THE ECONOMIC ENVIRONMENT - EXCHANGE RATES

Question 1

What are exchange rates

Answer 1

Exchange rates are the price of one currency in terms of another.

Question 2

What are exchange rates determined by

Answer 2

Demand for a currency - Just like anything, if there is demand for it, the price will go up (purchased for exports, inward foreign direct investment, increase in interest rates, spectaculation)

Supply of a currency (sold for imports, outward FDI, falls in interest rates, speculation)

Question 3

Impact of a currency appreciation

Answer 3

Price of imports falls meaning more competition from overseas competitors

Price of exports increase, Impact on overseas customers

Fall in the costs of production for firms that import raw materials

Opportunities to invest and expand overseas

Workers likely to be attracted to UK