Exchange rates

Why are exchange rates important?

They can affect how much it costs a business to buy materials or products from abroad.

What does it mean if there is an appreciation in the pound?

It is cheaper for firms in the UK to borrow from other countries.

Value of pound increases.

How can an appreciation of the pound effect consumers?

• cheaper imports

• consumers can buy more foreign goods

• increases disposable income

How does a depreciation of the pound affect consumers?

• Price of imports increase, increasing inflationary pressure.

• May deter investment as they do not know expected return on investment.

What happens if demand for the pound increases?

• Demand curve would shift to the right.

• This leads to appreciation of the pound.

What happens if supply of the pound increases?

• Supply curve shifts to left.

• Depreciation of the pound.

What are multinational companies?

Those with factories and production, or services, in more than one country.

What does globalisation mean?

Many businesses can now buy their raw materials from around the world.

e.g. may be cheaper for a wood company in Madrid to buy materials from Vietnam rather than Barcelona.