Chapter 14 Flashcards
factors impacting on exchange rates
International trade
Speculation
Interest rates
Political stability
Economic Growth
Using the idea of national trade what will happen to the currency if a country is exporting more or importing more
if a country is exporting more, then the demand for its currency will increase and
appreciate. The reverse will occur if a country ends up exporting less. The same is true for imports. If a
country starts to import more, then the supply of the domestic currency is going to increase as consumers
sell their currency in order to buy the currency they are importing from. Therefore, importing more leads
to a currency depreciating. The reverse will occur if a country ends up importing less.
Speculation
over recent years, trading of currencies has been popular for those hoping to make a
profit on movements in the exchange rate.
Economic Growth can occur how in terms of exchange rates
if a country is expected to grow, then foreign companies are more willing to set up
in a country and in order to do this, they have to purchase the currency. Therefore, strong economic
growth normally leads to a strengthening of the exchange rate. Concerns about UK growth after the
‘Brexit’ vote was a large reason why the £ weakened significantly after the vote.
Interest rates
across the globe there are international investors looking to put their money in places
that will earn interest. Therefore, if a country’s interest rate increases, it is likely that ‘hot money’ flows
from investors will enter the country and buy up the currency in order to put it into bank accounts in
that country. This will then lead to a strengthening of the currency. Speculators might often gamble
on whether interest rates are likely to go up or down and then buy or sell currency accordingly, in order
to hopefully make profit from the deals in the future.
Political stability effects investors decisions how
investors like safe places to store their money, therefore exchange rates weaken in
countries where some political upheaval is going on, such as the outbreak of a civil war or a new leader is
elected who is not well respected
If a currency gets stronger what happens to the imports and exports in terms of price
If a currency gets stronger, then it is cheaper to import and more expensive to export.
If a currency gets weaker, what happens to the imports and exports in terms of price.
more expensive to import and cheaper to export
If the exchange rate weakens why may there be a reduction in the standard of livings in the uk
Consumers are likely to be faced with higher prices for imported goods and therefore they would see
a reduction in their real standard of living and since UK traditionally is quite dependent on imports and therefore
it will have a significant impact on consume
if exchange rate weakens
A rise in import prices means follows a fall in living standards how
cost-push inflation is likely to increase as we ‘import inflation’.
This is because many firms will import their raw materials from abroad, and this now costs more. This
could then mean that all UK businesses increase their prices, and this will lead to further falls in the
standard of living.
if exchange rate weakens
Producers will be faced with the higher import prices what will happen to the producers revenue if the price elasticity of demand is elastic
Producers will be faced with the higher import prices and therefore their costs of production will rise.
This will shift supply to the left and lead to a rise in prices. Depending on the market, the producer will see
a fall in demand and lower revenue, assuming that price elasticity of demand is elastic.
if exchange rate weakens
How could producers exporting more lead to a n increase in demand and therefore a rise in revenue and then profits.
The UK could potentially
get ‘export-led’ growth as exporters can sell their goods at a cheaper rate in foreign markets. This will
likely lead to an increase in demand and therefore a rise in revenue and then profits.
if exchange rate weakens why is tourism likely to increase in the uk. and how does it benefit it
Because it is cheaper to visit the uk now
which is good for suppliers in the industry, but it will be more
expensive for UK consumers to go abroad.
