Economic Influences - Exchange Rates 2.5.1

Exchange rate - is the price of one currency expressed in terms of another e.g. £1 = $1.65. This means that an American would need to pay $1.65 to buy each £... or, we would need to pay 61p to buy each $.

Most exchange rates 'float', so their price (exchange rate) may go up or down. If the exchange rate goes down, there is depreciation. If it goes up, there is appreciation.

Exchange rate of the £

What happens…?

£ Rises ^

If the exchange rate of the pound changes from £1 = $1.75 to £1 = $2.00, the pound is said to be ‘stronger’ or has ‘risen’. The correct term is “appreciation”. Each pound can now buy more dollars than it did before.

£ Falls v

If the exchange rate of the pound changes from £1 = $1.75 to £1 = $1.50, the pound is said to be ‘weaker’ or has ‘fallen’. The correct term is “depreciation”. Each pound can now buy fewer dollars than it did before.

Much will depend upon how much the business is involved with international trade. However, many businesses that don't export can still be affected if some of their inputs are imported.

Businesses that export will want a depreciating or weaker £ - it will make them more competitive.
Businesses that import will want an appreciating or stronger £ - as their costs will fall and they can reduce prices or make more profit.

Exchange rate of the £	What happens…?	EXPORTERS	IMPORTERS
The pound appreciates (gets stronger)	· Exports become more expensive as foreign countries have to give up more of their money for the same number of pounds. · Our imports become cheaper as we have to give up fewer pounds to buy the same amount of foreign currency.	UNHAPPY	HAPPY
The pound depreciates (gets weaker)	· Exports become cheaper as foreign countries have to give up less of their money for the same number of pounds. · Our imports become more expensive as we have to give up more pounds to buy the same amount of foreign currency	HAPPY	UNHAPPY

Strong

Pound

Import

Cheap

Export

Dear

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Economic Influences - Exchange Rates 2.5.1

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Exchange rate of the £	What happens…?
£ Rises ^	If the exchange rate of the pound changes from £1 = $1.75 to £1 = $2.00, the pound is said to be ‘stronger’ or has ‘risen’. The correct term is “appreciation”. Each pound can now buy more dollars than it did before.
£ Falls v	If the exchange rate of the pound changes from £1 = $1.75 to £1 = $1.50, the pound is said to be ‘weaker’ or has ‘fallen’. The correct term is “depreciation”. Each pound can now buy fewer dollars than it did before.