Exchange Rates Flashcards
All 5 cards in this deck
What is an exchange rate?
The value of one country's currency compared with another country's currency.
What does the memory aid SPICED stand for in exchange rates?
Strong Pound, Imports Cheap, Exports Dear.
What are the steps to explain the effect of a fall in the value of the pound on a UK exporter?
e.g. the pound falls against the euro
- Exports become cheaper in the foreign currency — fewer euros are needed to buy the product from the UK.
- Customers save money, so demand rises.
- Higher volume of export sales, raising revenue and profit.
What is the effect of a rise in the value of the pound on a UK business that imports raw materials?
Imports become cheaper, so costs fall and profit margins rise.
Give one exchange rate risk a business should weigh up before deciding to trade internationally.
Exchange rates change unpredictably, so import costs can rise or export prices become uncompetitive, cutting profit margins.