exchange rates

what is a currency?

The system of money used in a country or group of countries

what is the exchange rate?

the price of one currency in terms of another currency

where is the exchange rate set at?

the equilibrium of the supply and demand of the currency for another currency

what does demand for the pound mean?

it means overseas economic groups are demanding pounds in order to buy a certain British good or service

what does supply of the pound mean?

it means domestic UK economic groups are supplying their pounds in exchange for another currency to buy international goods or services

what is a rise in the exchange rate?

it means an appreciation of the pound, the price of a currency goes up in terms of another currency

- caused by either increased demand for pounds or a decrease in the supply of pounds

what is a fall in the exchange rate?

- a depreciation of the pound, the price of the pound in terms of another currency decreases

- caused by a decrease in demand for pounds or an increase in the supply of pounds

what are the 4 main reasons overseas economic groups demand pounds?

- to buy uk goods or services

- to save money in a UK bank

- to speculate on the pound

- to invest in the UK

what factors affect the demand for the pound?

- UK goods and services become more desirable to overseas

- interest rates rise in UK compared to other countries meaning overseas will want to save in UK banks to earn a greater reward

- overseas incomes may have risen increasing their ability and

willingness to purchase products and some of this demand may be for UK products

- corporation tax in Uk falls meaning overseas will want to set up companies and business HQ's in the Uk as costs will be lower so higher profits

- oversea speculators speculate that the pound's value will rise in future hence will demand and buy more pounds from their currency and wait for the pounds value to go up so they can exchange it back into their own currency for more than they had originally in the future

what are the 4 main reasons why UK economic groups supply pounds?

-to buy oversea goods and services

-to save money in an overseas bank

- to speculate on oversea currencies

-to invest in overseas

what factors affect the supply of the pound?

- oversea goods and services have become more desirable to UK consumers

- interest rates have risen in overseas banks compared to UK banks meaning UK will want to save in overseas banks in order to gain a higher reward

-UK workers incomes may have risen meaning they will demand more and some of this may be for overseas products

- corporation tax in oversea countries may have fallen meaning UK companies would want to set up a HQ in overseas countries as costs will be lower so higher profits

- if UK speculators that an oversea countries' currencies will rise, they will supply and exchange their pounds fir the overseas currencies and wait for its value =e to rise, then exchange it back to pounds in order to gain profit

what is the historical data of the pound?

In 2008, the exchange rate peaked at US$1.85 per pound due to concerns about the US economy and its banking sector. It then dropped until March 2009 as uncertainty and banking issues grew in the UK.

From 2009 to 2015, the exchange rate rose slightly and remained relatively stable at a lower level, reflecting slow UK economic growth.

In 2016, the rate fell due to Brexit uncertainty, then stabilized between US$1.29 and US$1.34 with some fluctuations through 2018.

what is the effect of the exchange rate on consumers?

IF THERE IS A RISE IN ER

- import prices fall so consumers from domestic country are able and more willing to buy oversea goods and services

-An improved standard of living: domestic consumers may enjoy a better standard of living as their income can buy more imported goods. This depends on the type of good imported.

Increased tourism overseas: more domestic consumers may go overseas for holidays as their British pound will buy more foreign currency.

A fall in the inflation rate: due to total demand falling in domestic economy as more people purchasing imported goods, if imports grow and exports fall, there is likely to be a downward pressure on the price level on domestic goods and services. This may benefit consumers, as their income will now, in effect, buy more goods and services form their domestic country

what is the effect of exchange rate on producers?

After a rise in the exchange rate:

A fall in import prices: this is a benefit for producers who import raw materials, components or capital goods, as now their average costs will be lower and there is a chance of increased profits.

Increased tourism overseas: producers involved in the provision of holidays overseas, e.g. travel agents and airlines, should benefit from the increased demand from British consumers. However, producers involved in providing holiday and leisure services within the UK may suffer.

A rise in export prices: usually this would be expected to result in a fall in demand for goods from British producers, which may mean lower profits or losses leading to firms shutting down. However, if overseas consumers have inelastic PED for these British goods, they will not be responsive to the rise in price and may still continue to demand a similar quantity.

A fall in the inflation rate: due to total demand falling, if imports grow and exports fall, there is likely to be a downward pressure on the price level. This may benefit producers, as there is less need for wage rises, it should lower menu costs and British products become more internationally competitive.