Economic Environment in Practice: Exchange Rates & Unemployment (AQA A Level Business): Revision Note

Sales are likely to fall as products become more expensive when compared to overseas competitors

In order to remain competitive, exporting businesses may need to lower prices and accept lower profit margins

Costs are likely to fall as supplies from overseas become cheaper when compared to those domestically-produced 

Businesses may seek to expand the pool of overseas suppliers to further reduce costs and maximise profits

Sales are likely to rise as products become cheaper when  compared to overseas competitors

Businesses may choose to increase selling prices to increase profit margins

Costs are likely to rise as supplies from overseas become more expensive when compared to those domestically-produced 

Businesses may seek domestic suppliers to reduce costs and maintain profit levels

Pricing strategies in overseas markets may need to adapt when the pound moves, to protect competitiveness

A UK food exporter invoicing EU customers in pounds might assume it has no currency risk

However, if the pound rises four per cent against the euro, the EU distributor's local profit margin shrinks unless it raises prices, risking lower sales

Risk of reduced profit margins or lost sales if export prices rise following a stronger pound

Harder to forecast and budget accurately when the exchange rate is volatile

XP Power, a UK manufacturer, makes around 59 per cent of its £230.1 million revenue in North America

Because so much of its income is in dollars, its reported profit moves with the exchange rate

A stronger pound reduces the value of those earnings whilst a weaker pound increases it.

A weaker pound can make UK wages and operating costs more competitive for overseas investors, so they may make job-creating investments

Currency volatility can make it harder to plan international staffing or expansion budgets with confidence

Amazon committed £40 billion to UK investment between 2025 and 2027, including new fulfilment centres in Hull, Northampton and the East Midlands, creating thousands of jobs

The cost of imported materials, components or inventory changes directly with the exchange rate, affecting production costs

Businesses may need to review suppliers or use hedging to manage this risk

Kingfisher, which owns B&Q, protects itself against currency swings by hedging its US dollar costs for imported inventory and IT contracts

A larger pool of job applicants makes recruitment easier and often reduces the wages businesses need to offer

Lower risk of losing existing staff to competitors, as fewer alternative jobs are available

Weaker consumer confidence reduces spending, even among people who have not lost their job themselves, as fear of job losses makes people more cautious

Falling demand for goods and services, particularly non-essential or discretionary items

More people in work usually means higher consumer confidence and spending, boosting demand

Recruitment and employee retention become more difficult, as fewer people are actively looking for work

Greater pressure to raise wages to attract and retain employees, increasing labour costs

During periods of high unemployment, marketing often focuses on value products, promotions and price-based messaging as consumers become more cautious

However, being a value brand does not guarantee success if consumer confidence falls far enough

Poundland's sales fell by 7.3 per cent year-on-year over the 2025 Christmas period, showing that even a discount retailer can struggle when consumer confidence is very weak

Falling consumer spending during periods of high unemployment reduces revenue and makes financial forecasting less reliable

Frasers Group, owner of Sports Direct, saw sales in its UK Sports business fall 4.7 per cent in 2026, as weaker consumer confidence during a cooling job market led shoppers to cut back on non-essential spending

High unemployment and a cooling labour market make recruitment easier and reduces employee turnover

Staff have fewer alternative jobs to move to

UK job vacancies fell to around 711,000 in early 2026, the lowest level since 2021

Wage growth slowed to a four-year low of 4%, meaning employers faced far less competition for staff than in previous years

Falling demand during periods of rising unemployment may force businesses to scale back production or reduce shifts

Tesco reduced its UK and Ireland headcount by around 5,000 over the year, while still opening new stores and increasing its total selling space