IGCSE BUSINESS STUDIES Topic : How fluctuation in exchange rate affects business

 

Who gains and Who loses

How fluctuation in exchange rate affects business.

Let’s take the example of Britain and US. If the value of US$ fluctuates in comparison to UK Pound, then, how will it affect different businesses in United States?

Affect of Appreciation of currency

US Dollar becomes expensive as compared to British Pound.
In order words, there is an Appreciation in the value of US$
Earlier 1 Pound could get $1.5, Now 1 Pound can only get $1.3 (because US$ has appreciated)

It will directly affect US Importer and Exporters. Lets see how…

US Importers will GAIN...

because now US$ dollar can buy more from Britain. Earlier $1.5 could get only 1 Pound worth of goods from UK but now US importer have to pay only $1.3 to get 1 Pound worth of goods from UK.

• Imported goods from UK will become cheaper for US consumers.
• Goods using imported components from UK will become cheaper.
• US tourists travelling to UK will be able to enjoy more as they get more UK Pounds when they exchange dollars.

Customers will be happy but it might adversely affect the domestic industry as it will face competition from cheaper imports from UK. Domestic businesses will find it difficult to sell their products, will reduce output and cut jobs.

US Exporters will LOSE...

because now they will find it difficult to compete with other countries with comparatively cheaper exchange rate. UK businesses will now think twice to buy from US because earlier they could buy US$1.5 worth of good for £1, but now, they can only buy US$1.3 worth of goods due to appreciation in the value of US$.
Because of fewer exports, US business will reduce output, which will lead to unemployment.
So the moral of the story is ‘Though it is nice to hear that the value of our currency has appreciated but, in fact, it is not so nice for the economy’

Affect of Depreciation of currency

US Dollar falls in value as compared to UK Pound.
In order words there is Depreciation in the value of US$.
Earlier 1 Pound could get $1.5,
Now 1 Pound can get $1.8 (because US$ has depreciated)

US Importers will LOSE...

Imports will become expensive. Products which use imported components will become expensive. US tourists to UK will have to shell out more money for their vacation. Consumers will feel the pinch and might be unhappy. BUT domestic producers will gain as they will have a cost advantage over imported goods. Output will rise and so will employment.

US Exporters will GAIN...

because UK businesses will prefer to buy from US. US exporters will become more competitive in the International market due to cost advantage. As exports rise, more goods will be produced and thus more jobs will be created.