gcse economics - international trade - exchange rate movements
WHAT HAPPENS WHEN THE £ CHANGES IN VALUE?
EXAMPLE 1: EXPORTING (SELLING ABROAD)
SELLING A TABLE TO AMERICA. THE TABLE COSTS £100
YESTERDAY: £1 = $1.5
Cost to American £100 * 1.5 = $150
TODAY: £1 = $ 2 £ has got stronger
Cost to American £100 * 2 =$200
The strong £ has increased the price to foreigners. The UK business
may struggle to sell the table
TOMORROW
£1 = $1 £ has got weaker
Cost to American £100 * 1 = $100
The weak £ has reduced the cost to foreigners. The UK business should find it easier to sell the table
In each of the above examples the UK firm still receives £100
CONCLUSION
A strong £ or an increase in the value of the £ makes it more difficult for exporters to sell their goods abroad. This is because foreigners have to pay more in order to buy our goods.
The UK exporter could lower the price but then will lose some profit and may make a loss.
Therefore a strong £ can cause problems for businesses which export in foreign markets. It could cause
- unemployment
- slower economic growth
- a deficit on the balance of payments
EXAMPLE 2: IMPORTING (BUYING FROM ABROAD)
BUYING A TABLE FROM AMERICA. THE TABLE COSTS $100
YESTERDAY: £1 = $1.5
Cost to Britain $100 / 1.5 = £67
TODAY: £1 = $ 2 £ has got stronger
Cost to Britain $100 / 2 =£50
The strong £ has reduced the cost to UK importers. The UK people
may be more likely to import the table.
TOMORROW: £1 = $1 £ has got weaker
Cost to Britain $100 / 1 = £100
The weak £ has increased the cost to UK importers. The UK people are less likely to import the table.
In each of the above examples the US firm still receives $100
CONCLUSION
A strong £ or an increase in the value of the £ makes it cheaper to import raw materials or goods from abroad.
? Good for businesses who need raw materials
? Bad for UK businesses who compete against foreign imports
•
May reduce cost push inflation
A weak £ or a fall in the value of the £ makes it more expensive to import raw materials or other goods from abroad.
- Bad for businesses who import raw materials
- Good for UK businesses who compete against foreign imports
•
May cause cost push inflation
These GCSE Economics revision notes have been kindly provided by Peter Davies of Mill Hill School, Ripley Keep Up-todate with your GCSE Economics - Subscribe Free to Economics in the News by Email
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