1.5.3 Exchange rates HOLIDAY MONEY Jim is going on holiday in Italy. He has managed to save up £330 spending money and has gone to the bureau de change to change his money into Euros. The exchange rate is £1 to €1.57. How many Euros will Jim get for his money? Jim has €59 left when he returns home. Assuming the exchange rate is unchanged how many Pounds will Jim get when he changes his money back? 330 x 1.57 = €518.10 €59/1.57 = £37.58 1.5.3 Exchange rates 1.5.3 Exchange rates

What is an exchange Rate? The price of one currency in terms of another e.g. £1 = $1.50 An increase in the value of a currency is called an appreciation and means the currency is worth more e.g. £1 = $1.60 A decrease in the value of a currency is called a depreciation and means the currency is worth less e.g. £1 = $1.40 1.5.3 Exchange rates 2

Imports and exports Product Type of import/export Imports are goods or services that we buy from foreign producers. Visible imports are tangible products e.g. a Fiat car bought from an Italian producer. Invisible imports are intangible products e.g. a holiday in France. Exports are good or services that we produce and sell to foreign customers. Visible exports are tangible products e.g. a Morgan car. Invisible exports are intangible products e.g. a foreign student paying to go to a British university. Look at the products in the table. Are they invisible or visible exports or imports? Product Type of import/export Financial services sold to Dutch Visiting the World Cup in Brazil Brits buying a Chinese made t-shirt Germans buying a Jaguar car 1.5.3 Exchange rates 3

Imports and exports How do exchange rates affect a business? SPICED (strong pound: imports cheaper, exports dearer) Firms that import will be able to buy cheaper raw materials and finished goods Firms that export will see less demand WPIDEC (weak pound: imports dearer, exports cheaper) There will be greater demand from abroad for UK goods Input prices will increase if raw materials are imported If the firm has a price inelastic product it will be able to pass the increase in costs onto the consumer Explain why a depreciation of the Pound will lead to increased tourism from the EU 1.5.3 Exchange rates 4

How changes in the £/$ or £/€ affect small firms that trade abroad A bottle of German beer costs €1 and a bottle of British beer costs £1. If £1=$1= €1 it would cost an American $1 to buy either a German or a British beer. If the pound was to appreciate by 10% the exchange rate would now be: £1=$1.10= €1.10 The German beer would now cost the American $1 but they would need $1.10 to buy the British beer. What would happen to the demand for British beer? 1.5.3 Exchange rates 5

How changes in the £/$ or £/€ affect small firms that trade abroad A bottle of German beer costs €1 and a bottle of British beer costs £1. If £1=$1= €1 it would cost an American $1 to buy either a German or a British beer. If the pound was to depreciate by 10% the exchange rate would now be: £1=$0.90= €0.90 The German beer would now cost the American $1 but they would need $0.90 to buy the British beer. What would happen to the demand for British beer? 1.5.3 Exchange rates 6

How changes in the £/$ or £/€ affect small firms that trade abroad £1=$2=€1.50 To change British money into foreign money: British money x exchange rate So £2 x $2 = $4; £5 x €1.50 = €7.50 To change foreign money into British money: Foreign currency/exchange rate So $5/$2 = £2.50; €75/ €1.50 = £50 1.5.3 Exchange rates 7

changes in exchange rate affecting small businesses What happens to a small business if the £ changes in value: A business buys tinned tomatoes from Italy at €0.25 per tin. They buy 1000 tins per month. The exchange rate is £1 to €1.48. How much does it cost the firm each month at this exchange rate? The £ depreciates against the €. The new exchange rate is £1 to €1.26. How much does it now cost the firm each month at this exchange rate? 1000 x €0.25= €250. €250/1.48 = £168.92. At the new exchange rate: €250/1.24 = £201.61 1.5.3 Exchange rates 8

In small groups discuss the reasons for our export and imports UK Trading partners 2011 Look at the article from the Guardian newspaper Who are our fastest growing export markets? What products do we export? Who are our fastest growing import markets? What products do we import 2011 – the UK’s top trading partners by country and product In small groups discuss the reasons for our export and imports 1.5.3 Exchange rates 9

MULTIPLE CHOICE 1. The exchange rate between the pound and the euro stands at £1 = €1.37 How much would a German business buying 1500 bars of chocolate priced at 70p per bar from the UK have to pay in euros □ A €959 □ B €1438.50 □ C €1500 □ D €2055 2. How will a UK firm that imports materials from the US be effected by an increase in the value of the dollar? □ A The cost of importing from the US will go down □ B The cost of importing from the US will go up □ C There will be no effect on the firms costs □ D The cost of exporting to the US will go up 1. B 1500 x 70p = £1050 x 1.37 = 1438.50 2. B 1.5.3 Exchange rates 10