Economic Change - Exchange Rates

These flashcards cover key concepts regarding exchange rates, their appreciation and depreciation, effects on businesses related to imports and exports, and pricing strategies in response to currency fluctuations.

What is an exchange rate?

The price of one currency expressed in terms of another currency.

What is an appreciation in currency value?

An increase in the value of a currency, meaning it is worth more (e.g. £1 = $1.60).

What is a depreciation in currency value?

A decrease in the value of a currency, meaning it is worth less (e.g. £1 = $1.40).

How would the price of trainers change if the exchange rate appreciates to $1.60?

If the exchange rate appreciates to $1.60, trainers costing £50 would be $80 (calculated as £1 = $1.60 x £50).

How would the price of trainers change if the exchange rate depreciates to $1.40?

If the exchange rate depreciates to $1.40, trainers costing £50 would be $70 (calculated as £1 = $1.40 x £50).

How do exchange rate fluctuations impact businesses that import?

Businesses that import can buy cheaper raw materials and finished goods when the currency appreciates.

How do exchange rate fluctuations impact businesses that export?

Businesses that export may see less demand if their products become more expensive in the domestic market.

What happens to demand for UK goods if the pound weakens?

If the pound weakens, UK products become cheaper in the domestic market, leading to greater demand from abroad.

What is the effect on input prices if raw materials are imported during currency depreciation?

Input prices will increase if raw materials are imported when the currency depreciates.

What advantage does a business with a price inelastic product have during increased costs?

If the product is price inelastic, the business can pass the increase in costs onto the consumer without significantly reducing demand.