Consequences of Changes in Foreign Exchange Rates

Exam code: 2281

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

What happens when exchange rates change?

A change in the exchange rate affects the relative price of domestic and foreign goods. This influences how much consumers and firms buy and sell internationally.

If the currency appreciates (gets stronger), exports become more expensive for other countries, and imports become cheaper for domestic consumers
If the currency depreciates (gets weaker), exports become cheaper, and imports become more expensive

Effects of currency appreciation

Impact Area	Effect of appreciation
Exports	Become more expensive to foreigners → demand falls
Imports	Become cheaper → demand rises for foreign goods
Domestic firms	Exporters may lose customers; less revenue from overseas sales
Consumers	Benefit from cheaper imported goods and foreign travel
Inflation	Likely to fall as imported goods are cheaper and reduce cost pressures
Balance of Payments	May worsen if exports fall and imports rise, increasing the Current Account deficit

Effects of currency depreciation

Impact area	Effect of depreciation
Exports	Become cheaper to foreigners → demand increases
Imports	Become more expensive → demand falls for foreign goods
Domestic firms	Exporters benefit from higher sales → more output and possibly more jobs
Consumers	Face higher prices for imported goods such as electronics and fuel
Inflation	Likely to rise as cost of imported goods and raw materials increases
Balance of Payments	May improve if exports rise and imports fall, reducing the Current Account deficit

Case study

The UK Pound Depreciation After the 2016 Brexit Vote

In June 2016, the UK voted to leave the European Union (Brexit). As a result, there was major uncertainty in financial markets, and the value of the British pound (GBP) fell sharply against other major currencies.

Before the referendum: £1 ≈ $1.45
After the vote: £1 fell to ≈ $1.20 — a 17% depreciation

This depreciation affected trade, consumer prices, and the wider economy.

Impact

The weaker pound had the following effects:

Exports became cheaper for foreign buyers
- British-made goods and services were more affordable abroad
Imports became more expensive
- The UK had to pay more for imported products like fuel, food, and electronics
UK firms saw a rise in overseas demand but also higher input costs for imported raw materials
Consumers in the UK faced rising prices for everyday items due to more expensive imports

Macroeconomic result

UK exporters benefited, especially in manufacturing and tourism, as foreign customers took advantage of favourable exchange rates
Inflation rose in 2017, peaking at 3%, partly due to the higher import costs
The Current Account deficit narrowed slightly, helped by stronger exports and weaker import growth
Consumers faced reduced purchasing power, especially for imported goods, leading to pressure on real incomes and the standard of living

What happens when exchange rates change?

What happens when exchange rates change?

Effects of currency appreciation

Effects of currency depreciation

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