Exchange Rates · Revision Notes · Business

The exchange rate is the value of one currency expressed in terms of another
- For example, in August 2025, $1 was worth £0.75
Exchange rates are an important economic influence for businesses that import raw materials and components and for businesses that export their products
Exchange rates fluctuate for a range of reasons, including
- Changing demand for a currency
- Economic growth
- Changes to interest rates

The value of a currency changes over time
These changes can have a significant impact on business costs and overseas sales revenue

Currency appreciation is when the value of one country’s currency increases compared to another currency
When global demand for a currency rises, it appreciates
- This means that the value of a currency rises
  - For example, $1 = £0.75 goes to $1 = £0.60
- This appreciation makes exports from the UK relatively more expensive for US customers
  - Americans buying goods from the UK now have to pay more in dollars than they did previously
- Imports from the US become less expensive for UK customers

Currency depreciation is when the value of one country’s currency decreases compared to another currency
When global demand for a currency falls, it depreciates
- This means that the value of a currency falls
  - For example, $1 = £0.75 goes to $1 = £0.80
- This depreciation makes exports from the UK relatively more attractive to US customers
  - Americans buying goods from the UK now pay less in dollars than they did previously
- Imports from the US become more expensive for UK customers

Changing currency values can have a big impact on the business costs and sales revenue of MNCs

When a currency appreciates, it affects the price of exports and imports differently compared to when a currency depreciates

Change to currency value	Impact on exporting businesses	Impact on importing businesses
Appreciation	Sales are likely to fall as products become more expensive when compared to overseas competitors To remain competitive, exporting businesses may lower prices and accept lower profit margins	Costs are likely to fall as supplies from overseas become cheaper Businesses may expand the pool of overseas suppliers to further reduce costs and maximise profits
Depreciation	Sales are likely to rise as products become cheaper when compared to overseas competitors Businesses may choose to increase selling prices to increase profit margins	Costs are likely to rise as supplies from overseas become more expensive Businesses may seek domestic suppliers to reduce costs and maintain profit levels

Defining exchange rates