Presentation on theme: "A2 Business Studies – External Influences"— Presentation transcript:
1A2 Business Studies – External Influences Exchange Rates
2Exchange Rates 1.5131 1.1123 144.4448 UK – Pound (£) US - Dollar ($) The price of one country’s currency in terms of anotherIt is determined by the supply and demand of the poundUK – Pound (£)US - Dollar ($)EU- Euro (€)Japan - Yen(¥)11.51311.1123
3Exports - goods sold in foreign markets Imports - foreign goods brought into the market
4Demand for pounds Caused by: Desire for UK goods/services Desire to save in the UK (higher interest rates)More tourism in the UKSpeculators - believe pound will rise in future so buy nowHigher demand will push pound value up
5Supply of pounds May increase if: Greater demand for foreign goods Greater desire to save abroadMore tourism abroadSpeculators believe pound will fall in the futureHigher supply will push value of pound down
7Interest rates and exchange rates High interest rates attract foreign investment and therefore demand for pounds which pushes the value of the pound up (exchange rate)Low interest rates do not attract foreign investment and encourage investors to save abroad
8UK Manufacturer exporting to the US A Rise in Exchange RatesUSUK£1 = $1.5$75£50£1 = $2$100UK Manufacturer exporting to the US$75Average TV price in the US market
9A Rise in Exchange Rates Exporters become less competitive abroad = sales fallImports are cheaper compared with home market produced goodsFirms buying imported raw materials reduce costs
10UK Manufacturer exporting to the US A Fall in Exchange RatesUSUK£1 = $1.5$75£50£1 = $1$50UK Manufacturer exporting to the US$75Average TV price in the US market
11A Fall in Exchange Rates Exports are cheaper abroad and therefore more competitive = sales riseImports are more expensiveFirms importing raw materials will see costs rise
12Student Activity (10 minutes) An interest rate rise result in the exchange rate going from £1 = $2 to £1 = $4.How will this impact on:A US TV manufacturer selling its goods in the US and in the UK at $100.A UK TV manufacturer selling its TV for £80If interest rates drop and the exchange rate changes to £1 = $0.50. How will this impact on the two firms in both markets.
13Businesses affected by exchange rates Businesses that exportBusinesses selling goods in the UK competing against foreign importsBusinesses that purchase imported fuel, raw materials and components to produce their goods etc
14Effects of an increase in exchange rates e.g. before £1=$1.50, now £1=$2Price of exports sold abroad increases and import prices from abroad fallPrice elasticity of goods determines how much their demand and revenue fallsInelastic goods = less impact on sales, so higher revenue from more favourable exchange rateLikewise an importing company may get cheaper raw materials.However, domestic businesses may face cheaper competition from abroad.
15Businesses benefiting from a strong pound. Will firms increase profit margins or pass the saving onto the consumer with lower prices?
16Problems of fluctuating exchange rates Rate can change from day to day as determined by supply and demand of currencyImporters & exporters will face difficulties in predicting sales and long term planning may not be accurateFirms have ability to buy futures contracts - insurance that enables them to buy currency in advance at a guaranteed fixed rate. This reduces uncertaintyFluctuations also make marketing and administration difficult e.g. changing pricing and advertising literature abroad
17The effect of exchange rates on different types of business Exporters - will exchange rate changes impact on good and make them more or less competitive. (availability of substitutes)UK firms - are foreign firms becoming more competitive in home market?Firms importing raw materials - will impact on costsExchange rates always must be considered when moving into another country. They are a great source of uncertainty.
18Student ActivityComplete the questions related to the Jaguar case study.
19Exam Style QuestionA UK manufacturer selling its goods in the UK and US is facing a lower exchange rate (e.g. £1 = $1.70 rather than $2.00). How will this impact the manufacturer and what might they do about it?