Consequences of Changes in Foreign Exchange Rates (Cambridge (CIE) IGCSE Economics): Revision Note

The UK Pound Depreciation After the 2016 Brexit Vote

In June 2016, the UK voted to leave the European Union (Brexit). As a result, there was major uncertainty in financial markets, and the value of the British pound (GBP) fell sharply against other major currencies.

• Before the referendum: £1 ≈ $1.45

• After the vote: £1 fell to ≈ $1.20 — a 17% depreciation

This depreciation affected trade, consumer prices, and the wider economy.

Impact

The weaker pound had the following effects:

• Exports became cheaper for foreign buyers

  • British-made goods and services were more affordable abroad

• Imports became more expensive

  • The UK had to pay more for imported products like fuel, food, and electronics

• UK firms saw a rise in overseas demand but also higher input costs for imported raw materials

• Consumers in the UK faced rising prices for everyday items due to more expensive imports

Macroeconomic result

• UK exporters benefited, especially in manufacturing and tourism, as foreign customers took advantage of favourable exchange rates

• Inflation rose in 2017, peaking at 3%, partly due to the higher import costs

• The Current Account deficit narrowed slightly, helped by stronger exports and weaker import growth

• Consumers faced reduced purchasing power, especially for imported goods, leading to pressure on real incomes and the standard of living