Exchange Rates (Cambridge International IGCSE Business)
Defining exchange rates
-
The exchange rate is the value of one currency expressed in terms of another
- For example, in August 2025, $1 was worth £0.75
-
Exchange rates are an important economic influence for businesses that * import *raw materials and components and for businesses that **export **their products
-
Exchange rates** fluctuate** for a range of reasons, including
- Changing demand for a currency
- Economic growth
- Changes to interest rates
Exchange rate appreciation and depreciation
- The value of a currency changes over time
- These changes can have a significant impact on business costs and overseas sales revenue
Appreciation
-
Currency appreciation is when the value of one country’s currency increases compared to another currency
-
When global demand for a currency rises, it appreciates
-
This means that the value of a currency rises
- For example, $1 = £0.75 goes to $1 = £0.60
-
This appreciation makes exports from the UK relatively more expensive for US customers
- Americans buying goods from the UK now have to pay more in dollars than they did previously
-
Imports from the US become less expensive for UK customers
-
Depreciation
-
Currency depreciation is when the value of one country’s currency decreases compared to another currency
-
When global demand for a currency falls, it depreciates
-
This means that the value of a currency falls
- For example, $1 = £0.75 goes to $1 = £0.80
-
This depreciation makes exports from the UK relatively more attractive to US customers
- Americans buying goods from the UK now pay less in dollars than they did previously
-
Imports from the US become more expensive for UK customers
-
-
Changing currency values can have a big impact on the business costs and sales revenue of MNCs
Case Study How UK Exporters Benefited From a Weak Pound
In 2016, after the UK voted to leave the European Union, the value of the British pound depreciated against other currencies
- When the pound became weaker, UK products became cheaper for customers in other countries
- As a result, many UK businesses that sell products abroad saw an increase in sales
- For example, UK car and machinery manufacturers sold more goods to Europe and Asia because they were now better value for money
The effects of exchange rate change on businesses
Spec point — "how changes in exchange rates can affect businesses which import and export products and services, e.g. price, costs, competitiveness"
The effects of exchange rate change on businesses
- When a currency appreciates, it affects the price of exports and imports differently compared to when a currency depreciates
The impact of exchange rate change on exporting and importing businesses
| Change to currency value | Impact on exporting businesses | Impact on importing businesses |
|---|---|---|
| Appreciation | - Sales are likely to fall as products become more expensive when compared to overseas competitors - To remain competitive, exporting businesses may lower prices and accept lower profit margins | - Costs are likely to fall as supplies from overseas become cheaper - Businesses may expand the pool of overseas suppliers to further reduce costs and maximise profits |
| Depreciation | - 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 - Businesses may seek domestic suppliers to reduce costs and maintain profit levels |
Exam Hint A common error is to say a “strong currency is always good.” Not true. An appreciating exchange rate makes imports cheaper but exports less competitive. Always link the effect to whether the business mainly imports or exports before making a judgement
Was this revision note helpful?