Exchange rates

• exchange rate is the value of one currency in terms of another
• Exchange rates are an important economic influence for businesses that  import  raw materials and components and for businesses that export their products
• When the exchange rate decreases (e.g. the pound depreciates against the dollar)


  1. UK exports become cheaper for other countries

  2. This is good for UK exporters because their products become more competitively priced abroad, and so may be cheaper than similar products offered by businesses in other countries

  3. UK exporters might keep the same price in pounds, which could increase demand as the price abroad decreases

  4. UK exporters might increase their price in pounds, which will increase their profitability but won't increase demand
• A decrease in the exchange rate

  Bad for UK importers because imports become more expensive
• A decrease in the exchange rate

  1. UK importers might change suppliers so that they buy from UK suppliers instead

  2. UK importers may increase their prices to customers to cover the extra costs of buying from their suppliers
• Currency index number = exchange rate/ base exchange rate x100