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10.2 Exchange Rates:

Terms in this set (14)

What is an exchange rate?
An exchange rate is the value of one currency in terms of another currency
Give an example of an exchange rate
For example, £1 might be worth $1.20.
What do moving exchange rates affect?
Moving exchange rates affect the price of products.
What happens when the exchange rates increase?
When the exchange rate increases, UK exports become more expensive abroad, which is bad for UK exporters because their product becomes less competitively priced abroad.
What may UK exports have to do to overcome this?
This means that UK exporters may need to reduce their prices, which will affect their profits. They may also alter their marketing strategy and market to UK customers instead.
What does cheaper imports result in?
Cheaper imports mean higher profitability, which can lead to higher profits. This money can then be reinvested elsewhere into the business.
What happens when exchange rates decrease?
When the exchange rate decreases, UK exports become cheaper for other countries.
Why is this a good thing?
This is good because their products become more competitively priced abroad, and so may be cheaper than similar products offered by businesses in other countries.
What may UK exports do if the exchange rate decreases?
UK exporters might keep the same price in pounds, which could increase demand as the price abroad decreases, or they might increase their price in pounds, which will increase profitability but won't increase demand.
Who is a decrease in exchange rate bad for?
A decrease in exchange rate is bad for UK importers because imports become more expensive. UK importers might change suppliers so that they buy from UK suppliers instead. They may also increase their prices to customers to cover the extra costs of buying from their suppliers.
What can exchange rates be compared with?
Exchange rates can be compared using a currency index.
What can be used to compare the exchange rates for two different currencies?
You can use currency indices to compare the exchange rates for two different currencies.
What does each currency have?
Each currency will have a different base rate, but using the currency indices means that they will both change in relation to a starting value of 100, this makes it easier to compare the exchange rates of different currencies.
How is the currency index number calculated?
Exchange rate/base rate x 100
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