The Impact of Exchange Rate Changes | Business Studies for GCSE/IGCSE - Year 11 PDF Download

Exchange Rates Defined

• An exchange rate denotes the value of one currency relative to another, such as £1 = €1.18. International currencies function as commodities traded on the foreign exchange market (forex).
• The exchange rate system, which determines the value of a country's currency, is regulated by the Central Bank of the respective nation.
• Exchange rates significantly impact businesses involved in importing raw materials and components, as well as those engaged in exporting their products.

Appreciation and Depreciation of Exchange Rates

• The Dynamics of Currency Value:
  • The value of a currency undergoes changes over time due to shifts in global demand.
  • When there is an increase in global demand for a currency, it appreciates in value.
  • For instance, if £1 was equal to €1.18 and rises to £1 = €1.25, Europeans purchasing goods from the UK have to spend more euros than before.
  • This appreciation makes UK exports relatively more costly and imports less expensive.
  • Conversely, when global demand for a currency diminishes, the currency depreciates.
  • Depreciation occurs when the value of a currency decreases, like £1 going from €1.18 to €1.05.
  • With this change, Europeans buying goods from the UK now pay fewer euros than previously.
  • This depreciation enhances the attractiveness of UK exports to Europe and reduces the attractiveness of imports.

• Impact on Multinational Corporations (MNCs):

  • Fluctuations in currency values can significantly affect the operational costs and sales revenue of Multinational Corporations (MNCs).

How Currency Fluctuations Impact Importers & Exporters

• The impact of currency fluctuations on businesses hinges on the volume of their import and export activities and the countries involved in these transactions.
• Businesses engaged in exporting gain advantages from currency depreciation, whereas those involved in importing benefit from currency appreciation.

The Impact on Business of Currency Appreciation & Depreciation