1. A2 Business Studies – External Influences
Exchange Rates

2. Exchange Rates 1.5131 1.1123 144.4448 UK – Pound (£) US - Dollar ($)
The price of one country’s currency in terms of another
It is determined by the supply and demand of the pound
UK – Pound (£)
US - Dollar ($)
EU- Euro (€)
Japan - Yen(¥) 1
1.5131
1.1123

3. Exports - goods sold in foreign markets
Imports - foreign goods brought into the market

4. Demand for pounds Caused by: Desire for UK goods/services
Desire to save in the UK (higher interest rates)
More tourism in the UK
Speculators - believe pound will rise in future so buy now
Higher demand will push pound value up

5. Supply of pounds May increase if: Greater demand for foreign goods
Greater desire to save abroad
More tourism abroad
Speculators believe pound will fall in the future
Higher supply will push value of pound down

6. AS External Influences
Exchange rate changes

7. Interest rates and exchange rates
High interest rates attract foreign investment and therefore demand for pounds which pushes the value of the pound up (exchange rate)
Low interest rates do not attract foreign investment and encourage investors to save abroad

8. UK Manufacturer exporting to the US
A Rise in Exchange Rates US UK
£1 = $1.5
$75
£50
£1 = $2
$100
UK Manufacturer exporting to the US
$75
Average TV price in the US market

9. A Rise in Exchange Rates
Exporters become less competitive abroad = sales fall
Imports are cheaper compared with home market produced goods
Firms buying imported raw materials reduce costs

10. UK Manufacturer exporting to the US
A Fall in Exchange Rates US UK
£1 = $1.5
$75
£50
£1 = $1
$50
UK Manufacturer exporting to the US
$75
Average TV price in the US market

11. A Fall in Exchange Rates
Exports are cheaper abroad and therefore more competitive = sales rise
Imports are more expensive
Firms importing raw materials will see costs rise

12. Student Activity (10 minutes)
An interest rate rise result in the exchange rate going from £1 = $2 to £1 = $4.
How will this impact on:
A US TV manufacturer selling its goods in the US and in the UK at $100.
A UK TV manufacturer selling its TV for £80
If interest rates drop and the exchange rate changes to £1 = $0.50. How will this impact on the two firms in both markets.

13. Businesses affected by exchange rates
Businesses that export
Businesses selling goods in the UK competing against foreign imports
Businesses that purchase imported fuel, raw materials and components to produce their goods etc

14. Effects of an increase in exchange rates
e.g. before £1=$1.50, now £1=$2
Price of exports sold abroad increases and import prices from abroad fall
Price elasticity of goods determines how much their demand and revenue falls
Inelastic goods = less impact on sales, so higher revenue from more favourable exchange rate
Likewise an importing company may get cheaper raw materials.
However, domestic businesses may face cheaper competition from abroad.

15. Businesses benefiting from a strong pound.
Will firms increase profit margins or pass the saving onto the consumer with lower prices?

16. Problems of fluctuating exchange rates
Rate can change from day to day as determined by supply and demand of currency
Importers & exporters will face difficulties in predicting sales and long term planning may not be accurate
Firms have ability to buy futures contracts - insurance that enables them to buy currency in advance at a guaranteed fixed rate. This reduces uncertainty
Fluctuations also make marketing and administration difficult e.g. changing pricing and advertising literature abroad

17. The effect of exchange rates on different types of business
Exporters - will exchange rate changes impact on good and make them more or less competitive. (availability of substitutes)
UK firms - are foreign firms becoming more competitive in home market?
Firms importing raw materials - will impact on costs
Exchange rates always must be considered when moving into another country. They are a great source of uncertainty.

18. Student Activity
Complete the questions related to the Jaguar case study.

19. Exam Style Question
A UK manufacturer selling its goods in the UK and US is facing a lower exchange rate (e.g. £1 = $1.70 rather than $2.00). How will this impact the manufacturer and what might they do about it?