# Exchange Rates

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Category: Education

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Teacher presentation

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Exchange Rates

### PowerPoint Presentation:

Exchange Rates Every time a UK citizen or business wants to buy something from abroad they need to pay for that product in the currency of the country where it is produced They will need to exchange £s for that currency The amount they pay for the currency depends on the exchange rate If the exchange rate was £1:\$2 the person would have to pay 50p for every dollar For a product that cost \$10 they would pay £5 If it was £1:\$1 each dollar would cost £1 For a product that cost \$10 they would pay £10 This is the same if a foreign citizen or business wants to buy a UK product/service They have to buy pounds Exchange Rate : the rate at which one currency exchanges for another

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At P £1 = €1.2 At P1 £1 = €1.3 The pound can buy more Euros so it is stronger Exchange Rates The exchange rate is the price for money Just as with any other good the market creates the price If Europe wants to buys more UK exports they will have to buy pounds there will be a shift in demand The price of the pound increases The exchange rate gets stronger A consumer or producer will get more foreign currency for their money This means that imports will be cheaper Exports will be more expensive Strong Pound; Imports Cheap; Exports Expensive SPICEE Price of £’s in Euros Quantity of £ D S Q P D1 P1

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At P £1 = €1.3 At P1 £1 = €1.2 The pound can buy less Euros so it is weaker Exchange Rates If Europe buys less UK exports There will be an inward shift of demand The price of the pound will fall The exchange rate weakens Consumers and producers will get less foreign currency for your money Imports will be expensive Exports will be cheaper Price of £’s in Euros Quantity of £ D1 S Q1 P1 D P WIDEC Weak Pound; Imports Dear (expensive); Exports Cheap (WIDEC) Q

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Effects of Exchange Rates on Exports When the pound is weak a European country wants to buy a UK good/service will get more pounds for their money This means that the price of their good will be cheaper in comparison to other countries That foreign country will buy the good from UK rather than elsewhere A weak pound makes the UK more competitive and so it is good for exports It will help to move towards improving the balance of payments X is larger so (X-M) is larger (ceteris paribus) When the pound is strong exports will suffer

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Effects of Exchange Rates on Exports If the pound is weak travel from foreign countries to the UK will be cheaper (remember that travel from a foreign country to the UK is an export of a service) This means that more foreigners/tourists will travel to the UK Whilst they are in the UK they will spend more because they are getting more for their money All of this helps the UK economy; more jobs, income and growth Weak Pound; Imports Dear (expensive); Exports Cheap (WIDEC) WIDEC

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Effects of Exchange Rates on Imports When the pound is weak the UK will get less foreign currency for their money The price of these imported goods will be more expensive This may encourage UK consumers to buy more British goods For businesses that use foreign raw materials this is not good because their costs will increase If their costs increase they will pass this cost increase onto the consumer in the form of a higher price ( cost push inflation ) When the pound is weak this is good for the balance of payments because there may be less imports M will be smaller and (X-M) will be larger (ceteris paribus)

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Effects of Exchange Rates on Imports What is happening here? The falling pound (getting weaker) means that import prices are higher and export prices are lower The farmers may be able to export their produce abroad Imported foods will be more expensive so UK produced meat, fruit and vegetable should be relatively cheaper to buy The farmers gain from more exports and more domestic sales Weak Pound; Imports Dear (expensive); Exports Cheap (WIDEC)

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Exchange Rates and the individual consumer The exchange rate, via its effect on prices, is not the only influence on demand for imports and exports What other things will affect demand? Style and image Quality Reliability BMWs are a prime example of a good that is expensive but people still want to buy it because of its quality and style Other examples Champagne from France Caviar from Russia Gemstones High fashion Oil is something on which the UK depends and demands – price makes little difference to the amount the UK imports in the short term All of these goods have an inelastic PED Examiner’s tip : Remember that exchange rates (price) are not the only thing that determines whether or not we buy imported products or whether foreigners buy UK exports