The Impact of Exchange rate Changes · Revision Notes · Business

An exchange rate is the price of one currency in terms of another, e.g. £1 = €1.18
- International currencies are essentially products that can be bought and sold on the foreign exchange market (forex)
The Central Bank of a country controls the exchange rate system that is used in determining the value of a nation's currency
Exchange rates are an important economic influence for businesses that import raw materials and components, and for businesses that export their products

The value of a currency changes over time
- When global demand for the currency rises, the currency appreciates
  - Appreciation occurs when the value of a currency rises, e.g. £1 = €1.18 goes to £1 = €1.25
    - Europeans buying goods from the UK now have to pay more in euros than they did previously
    - This appreciation makes exports from the UK relatively more expensive and imports less expensive
- When global demand for the currency falls, the currency depreciates
  - Depreciation occurs when the value of a currency falls, e.g. £1 = €1.18 goes to £1 = €1.05
  - Europeans buying goods from the UK now pay less in euros than they did previously
  - This depreciation makes exports to Europe relatively more attractive and imports less attractive
Changing currency values can have a big impact on the business costs and sales revenue of MNCs

The extent to which businesses are affected by currency fluctuations will depend upon the volume they are importing or exporting and the countries with which these transactions take place
Exporting businesses benefit from currency depreciation, whilst importing businesses benefit from currency appreciation

Change to currency value	Impact on exporting businesses	Impact on importing businesses
Appreciation An increase in the value of a currency against others	Sales are likely to fall as products become more expensive when compared to overseas competitors In order to remain competitive, exporting businesses may need to lower prices and accept lower profit margins	Costs are likely to fall as raw materials from overseas become cheaper
Depreciation A decrease in the value of a currency against others	Sales are likely to rise as products become cheaper when compared to overseas competitors	Costs are likely to rise as raw materials from overseas become more expensive Businesses may seek domestic suppliers to reduce costs and maintain profit levels

Change to currency value

Impact on exporting businesses

Impact on importing businesses

Appreciation

An increase in the value of a currency against others

Sales are likely to fall as products become more expensive when compared to overseas competitors
In order to remain competitive, exporting businesses may need to lower prices and accept lower profit margins

Depreciation

A decrease in the value of a currency against others

Sales are likely to rise as products become cheaper when compared to overseas competitors

Costs are likely to rise as raw materials from overseas become more expensive
Businesses may seek domestic suppliers to reduce costs and maintain profit levels

Exchange rates defined