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Exchange Rates

Business: Edexcel IGCSE, topic 1.5.2

Exchange Rate

An exchange rate is the value of one currency in terms of the other. For example, £1 is worth around $1.4. An exchange rate can fluctuate (change) regularly and this can have implications for UK businesses that buy goods or sell goods in other countries.

International sales

International sales

  • Whenever a UK company wants to sell a good in another country, they sell it in another currency.
  • A Rolls Royce car sold in the United States will be bought by a consumer in the United States in a price quoted in US dollars.
  • Whenever UK businesses buy goods from foreign firms, the foreign firm’s valuation of pounds depends on what a pound is worth in their currency.
Strong pound

Strong pound

  • A strong pound means that the pound can buy a lot of another currency.
Weak pound

Weak pound

  • A weak pound is when the pound cannot buy a lot of the other currency relative to what it could purchase when the pound was stronger.

How the Exchange Rate Impacts Businesses - a Weak Pound

A weak pound is good for UK exporters (a company who sells goods in other countries). Because of the same logic, a weak pound is bad for importers.

Weak pound - good for exporters

Weak pound - good for exporters

  • When the pound is weak, a UK company can sell a product for less in another country in order to receive the same amount of pounds.
  • A business sells a tennis ball for £1. If the exchange rate for dollars is $1.5 to £1, a tennis ball would cost $1.5 in the USA.
  • If the pound was weaker at $1.25. Then a tennis ball would only cost $1.25 in the US. This would make it more attractive to US consumers, who would buy UK tennis balls.
  • UK businesses become more price competitive relative to US businesses. They should make higher sales and more profit.
Weak pound - bad for importers

Weak pound - bad for importers

  • When paying for a good in another currency, the business will have to pay more pounds to get the exact same product.
  • E.g if a UK business was importing raw materials for production then the costs of these raw materials would rise. This would have a negative effect on profit. The UK business would either have to raise their price to cover the increase in costs (which would lead to fewer sales) or it would make less profit.

Test yourself on Exchange Rates

  • Roughly what is the exchange rate between the pound and the US dollar?

  • Is a weak pound good or bad for UK exporters?

  • Which of the following are true for a weak pound?

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