The Economy and Business Exchange Rates Exchange Rates
The Economy and Business Exchange Rates
Exchange Rates - Defintion • Exchange Rates are the price of one currency expressed in terms of another. In other words how much of a foreign currency £ 1 will buy you. Or how much a £ 1 costs a foreigner to buy. • E. g. • £ 1 = $1. 25 or • £ 1 = 1. 15 Euro • The pound has an exchange rate with every single currency in the world.
Strong Pound – Weak Pound Strong Pound Weak Pound • When the pound buys more of a foreign currency it is said to have got stronger. E. g • £ 1 = $1. 25 • £ 1 = $1. 40 • When the pound buys less of a foreign currency it is said to have got weaker. E. g • £ 1 = $1. 25 • £ 1 = $1. 10
EXCHANGE RATE CALCULATIONS • REMEMBER : • • WHEN CONVERTING FROM POUNDS INTO FOREIGN CURRENCY YOU MUST MULTIPLY BY THE EXCHANGE RATE • • AND • • WHEN CONVERTING FROM FOREIGN CURRENCY INTO POUNDS YOU MUST DIVIDE BY THE EXCHANGE RATE
Ex Rate Calculations - Examples CONVERTING FROM POUNDS INTO DOLLARS – YOU MUST MULTIPLY CONVERTING FROM DOLLARS IN POUNDS – YOU MUST DIVIDE • E. G. • £ 1 = $1. 25 • So £ 100 pounds buys you $125 • So $200 pounds buys you £ 160 • £ 100 x $1. 25 = $125 • $200 / $1. 25 = £ 160
Strong Pound • This means the pound will buy more of a foreign currency so UK imports will be cheaper. • It also means that the pound costs foreigners more to buy. This will make UK exports more expensive abroad. • Not necessarily good for the UK as we will buy more foreign imports and less UK made products and foreigners will buy less UK made products
Weak Pound • This means the pound will buy less of a foreign currency so UK imports will be more expensive. • It also means that the pound costs foreigners less to buy. This will make UK exports cheaper abroad. • This might be quite good for the UK as we will buy less foreign imports and more UK made products and foreigners will buy more UK made products
Effects of Exchange Rate Fluctuations • Changes in the value of sterling impact on different people in different ways. • Some people gain from a strong pound others lose out. • Some people gain from a weak pound and others lose out.
Two Very Useful Acronyms • SPICED • WIDEC • S trong • P ound • I mports • C heaper • E xports • D earer • W eak Pound • I mports • D earer • E xports • C heaper
Strong Pound – SPICED
Effects of a Strong Pound – Remember SPICED • Winners • Losers • UK tourists as holidays abroad appear cheaper • UK firms who import their raw materials • UK firms who import foreign goods for re-sale here. • Foreign firms who want to sell their products in the UK • UK firms who want to sell their goods abroad • UK firms who are forced to compete with foreign imports • Holiday firms based in the UK. We will all go abroad and foreign tourists will find the UK expensive. • The UK Economy
Weak Pound - WIDEC
Effects of a Weak Pound- Remember WIDEC • Winners • • • Losers • UK tourists as holidays abroad appear more UK firms who want to sell their goods abroad. expensive UK firms who are forced to • UK firms who import raw compete with foreign materials imports. • UK firms who import foreign Holiday firms based in the UK. goods for re-sale here. We will all stay here and foreign tourists will find the • Foreign firms who want to UK cheap sell their products in the UK The UK Economy
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