Exchange Rate Fluctuations
- Global competitiveness is the ability of a business to perform better than its rivals across markets in different countries
- Fluctuations in exchange rates can influence the competitiveness of business
- An exchange rate is the value of one currency in terms of another currency
- An exchange rate is the value of one currency in terms of another currency
- Currency appreciation and depreciation have different impacts on a business
Currency appreciation
- An appreciation of the exchange rate means the value of a currency increases against another currency
- E.g. if £1= $1.60 and then increases to £1 = $1.80, the value of the £ has appreciated against the US$
- E.g. if £1= $1.60 and then increases to £1 = $1.80, the value of the £ has appreciated against the US$
The Impact of Currency Appreciation on Global Competitiveness
Advantages of an Appreciation |
Disadvantages of an Appreciation |
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Currency depreciation
- A depreciation of the exchange rate means the value of the currency decreases against another currency
- E.g. If £1 = $1.60 and then falls to £1 = $1.20 the value of the £ has depreciated against the US$
- E.g. If £1 = $1.60 and then falls to £1 = $1.20 the value of the £ has depreciated against the US$
The Impact of a Currency Depreciation on Global Competitiveness
Advantages of a Depreciation |
Disadvantages of a Depreciation |
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Exam Tip
Paper 1 and Paper 3 frequently question you on the impact of exchange rate changes on a business. The information may be presented as a) a written extract or b) a table or graph showing the fluctuations in the exchange rate. It is important to be able to explain whether an appreciation or depreciation has occurred
Acronyms to help explain the impact of exchange rate changes include:
S.P.I.C.E.D - Strong Pound Imports Cheaper Exports Dearer (dearer means more expensive)
W.P.I.D.E.C - Weak Pound Imports Dearer Exports Cheaper
You can use the ‘pound’ interchangeably with any other currency used in the exam