Business Studies – 6.2.4 Exchange rates | e-Consult

A change in the exchange rate can significantly impact businesses involved in international trade, particularly those that export. The effect depends on whether the domestic currency strengthens or weakens relative to the foreign currency.

Impact on Price: If the domestic currency strengthens (appreciates), the price of exports in foreign markets becomes more expensive for foreign buyers. This can lead to a decrease in demand for the exported goods and services. Conversely, if the domestic currency weakens (depreciates), the price of exports becomes cheaper for foreign buyers, potentially increasing demand.

Impact on Costs: A weaker domestic currency increases the cost of imported raw materials, components, and machinery. This can lead to higher production costs for the exporting business. A stronger domestic currency reduces the cost of imports, potentially lowering production costs.

Impact on Competitiveness: A weaker domestic currency makes a business's exports more competitive in foreign markets because the prices are lower. A stronger domestic currency makes exports less competitive. Businesses may need to adjust their pricing strategies, explore cost-cutting measures, or focus on product differentiation to maintain competitiveness in the face of exchange rate fluctuations.

Example: Consider a UK company exporting electronics to the US. If the pound sterling strengthens against the US dollar, the electronics become more expensive for US consumers, potentially reducing sales. However, the company's imported components from Asia would become cheaper, potentially offsetting some of the negative impact.