Unit 3 - Exchange Rates Flashcards
What is an exchange rate?
An exchange rate is the price of one currency in terms of another.
Be able to calculate exchange rates.
Practise
What does it mean if there is an appreciation in the exchange rate?
Appreciation (SPICED - Strong Pound, Imports Cheaper, Exports Dearer)
An appreciation or strengthening of the exchange rate means £1 buys you more foreign currency.
What happens if there is an appreciation in the exchange rate?
-Goods in other countries are cheaper. This is because UK buyers get more foreign currency for the £. Therefore, it is cheaper to import goods from abroad.
-UK goods are dearer for foreigners to buy. This is because overseas buyers now get less Sterling for their currency so this increases the price of exports. This makes exports less attractive and reduces demand for exports. This then reduces revenue/profit for exporting firms. To remain competitive abroad UK firms may have to reduce prices or accept a reduced profit margin.
-An appreciation will have a negative impact on the Balance of Payments as the value of exports is less than the value of imports.
-An appreciation will also have an impact on tourism. An appreciation will make it cheaper for UK citizens to go abroad. If they take £500 spending money, at the above rate they would now get $1000 compared to $750 at the previous rate.
-However, an appreciation of currency is not so good for foreign visitors to the UK as they get LESS Sterling for their currency, making it more expensive to come to the UK on holiday.
What does it mean if there is a depreciation in the exchange rate?
Depreciation (WIDEC - Weak Pound, Imports Dearer, Exports Cheaper)
A depreciation or weakening of the exchange rate means £1 buys you less foreign currency
What happens if there is a depreciation in the exchange rate?
-Goods in other countries are now dearer as UK firms/consumers get less foreign currency for each £. Therefore, UK citizens will buy less goods from abroad as the price of imports has increased and imports bought by UK firms/consumers will fall. Another way of saying this is that the UK firm has to use more £ for foreign currency because imports are dearer. Therefore the UK firm may have to raise its prices in order to maintain profits. Or it can reduce its profit margin in order to maintain the price. The UK firm may decide to buy from other UK firms as importing is now more expensive.
-UK exports are now cheaper as foreigners can buy more Sterling with their currency. Therefore, there will be greater demand for exports as they are now cheaper and more competitive abroad, making them more attractive to overseas buyers.
-A depreciation will have a positive impact on the Balance of Payments as the value of exports is greater than the value of imports.
-A depreciation will also have an impact on tourism. A depreciation will make it more expensive for UK citizens to go abroad. If they take £500 spending money, at the above rate they would now only get $500 compared to $750 at the previous rate. However, a depreciation is good for foreign visitors to the UK as they get MORE Sterling for their currency.
What is the impact of an appreciation in exchange rates on individuals?
-It is cheaper to import goods from abroad.
-It is cheaper to go abroad on holiday.
What is the impact of an appreciation in exchange rates on firms?
-If the firm exports, then demand for exports will fall.
-If the firm imports raw materials and components for production, then it is cheaper and this represents a fall in the costs of production.
What is the impact of an appreciation in exchange rates on economy?
-Imports will increase meaning a worsening of the current account deficit.
-Exporters will lay off workers.
-Importers can reduce price so inflation might fall.
What is the impact of a depreciation in exchange rates on individuals?
-It is dearer to import goods from abroad.
-It is dearer to go abroad on holiday.
What is the impact of a depreciation in exchange rates on firms?
-If the firm exports, then demand for exports will rise.
-If the firm imports raw materials and components for production, then it is dearer and this represents a rise in the costs of production.
What is the impact of a depreciation in exchange rates on an economy?
-Exports will increase meaning a reduction in the current account deficit or a surplus.
-Importers might lay off workers due to an increase in the costs of production.
-Inflation might rise because importers increase price to protect their profit margins
