Unit 1 Topic 1.5.3

Must learn: the concept of exchange rates & how to calculate exchange rates

Should learn: how exchange rates work and how they affect businesses and consumers

Could learn: the impact of exchange rates on imports and exports

Sam wants to download some music from the Internet. He hasspent a long time researching and has found three companies who seem to offer the best deals. One is based in the UK, one

in the USA and one in Germany.

These are the prices they are charging for registration:◦ Tunes unlimited [UK company] - £30◦ EZiest download [USA company] - $50◦ Musikwik [German company] - €50

He found out that the exchange rates were:£1 = $1.85£1 = €1.45

Which would be the best deal for Sam?

Sam wants to download some music from the Internet. He hasspent a long time researching and has found three companies

whoseem to offer the best deals. One is based in the UK, one in the USA and one in Germany. These are the prices they are

charging for registration:

Tunes unlimited [UK company] - £30EZiest download [USA company] - $50 = 50/1.85 = £27.03Musikwik [German company] - €50

He found out that the exchange rates were:£1 = $1.85£1 = €1.45

Which would be the best deal for Sam?

Sam wants to download some music from the Internet. He hasspent a long time researching and has found three companieswho seem to offer the best deals. One is based in the UK, one

in the USA and one in Germany. These are the prices they arecharging for registration:

Tunes unlimited [UK company] - £30EZiest download [USA company] - $50 = 50/1.85 = £27.03Musikwik [German company] - €50 = 50/1.45 = £34.48

He found out that the exchange rates were:£1 = $1.85£1 = €1.45

Which would be the best deal for Sam?

Sam wants to download some music from the Internet. He hasspent a long time researching and has found three companieswho seem to offer the best deals. One is based in the UK, one

in the USA and one in Germany. These are the prices they arecharging for registration:

Tunes unlimited [UK company] - £30EZiest download [USA company] - $50 = 50/1.85 = £27.03Musikwik [German company] - €50 = 50/1.45 = £34.48

He found out that the exchange rates were:£1 = $1.85£1 = €1.45

Which would be the best deal for Sam?

http://www.bbc.co.uk/news/business/market_data/currency/default.stm

Sell

UK export businesses want paying in pounds.

Foreign customers will

therefore have to change their currency into pounds to make the payment.

Buy

UK import businesses have to change pounds into foreign currencies to buy from suppliers

A business sells exercise equipment to companies in a variety of different countries. Its cycling machine has a price in the UK of £250. How much the equipment would sell for in the following countries:

United States Germany Turkey Australia Japan Canada

£1 =US Dollar 1.97Euro 1.52Turkish Lira 2.76Australian Dollar 2.54Japanese Yen 239Canadian Dollar 2.33

Remember Rule

To change pounds into another currency, multiply by the rate. E.g. at £1 = €1.48, £50 changed into Euro would be 50 x 1.48 = €74.

A business sells exercise equipment to companies in a variety of different countries. Its cycling machine has a price in the UK of £250. How much the equipment would sell for in the following countries:

United States = $492.50 Germany = €380 Turkey = 690 Lira Australia = AUS$635 Japan = 59750 Yen Canada = Can$582.50

£1 =US Dollar 1.97Euro 1.52Turkish Lira 2.76Australian Dollar 2.54Japanese Yen 239Canadian Dollar 2.33

The same business buys in a number of parts for its exercise bicycle from different countries. Use the currency tables to calculate how much it will have to pay for the parts if they are priced in the home country as follows:

Denmark - Kr150 Mexico - Peso 500 India - Rupees 750 Taiwan - Taiwan Dollars 690

£1 = Danish Kroner 11.30Mexican Peso

21.52585Indian Rupees 86.47Taiwan Dollars 64.84

Remember Rule

To change a foreign currency back into pound, divide the sum by the rate. E.g. to change €90 into pounds, divide 90 by 1.48 = £60.81

The same business buys in a number of parts for its exercise bicycle from different countries. Use the currency tables to calculate how much it will have to pay for the parts if they are priced in the home country as follows:

Denmark - £13.27 Mexico - £23.23 India - £8.67 Taiwan - £10.64

£1 = Danish Kroner 11.30Mexican Peso 21.52585Indian Rupees 86.47Taiwan Dollars 64.84

For importers, the problem is when exchange rates fall. They can either up the price they have to charge customers or lower their profit margins.

For exporters, rising exchange rates may lead to a fall in the demand for their products and make it much harder for them to be able to compete in foreign markets.

Exchange Rate Total cost of 200 trainers [in £]

More expensive or cheaper than in the previous month?

May £1 = €1.47

June £1 = €1.39

July £1 = €1.43

Mini Plenary -- Sports Shop Imports

Trainers cost you €30 and you want to sell them for £40

Exchange Rate Total cost of 200 trainers [in £]

More expensive or cheaper than in the previous month?

May £1 = €1.47 £4082

June £1 = €1.39

July £1 = €1.43

Mini Plenary -- Sports Shop Imports

Trainers cost you €30 and you want to sell them for £40

Exchange Rate Total cost of 200 trainers [in £]

More expensive or cheaper than in the previous month?

May £1 = €1.47 £4082

June £1 = €1.39 £4317 More expensive

July £1 = €1.43

Mini Plenary -- Sports Shop Imports

Trainers cost you €30 and you want to sell them for £40

Exchange Rate Total cost of 200 trainers [in £]

More expensive or cheaper than in the previous month?

May £1 = €1.47 £4082

June £1 = €1.39 £4317 More expensive

July £1 = €1.43 £4196 Cheaper

Mini Plenary -- Sports Shop Imports

Trainers cost you €30 and you want to sell them for £40

A UK fruit wholesaler buys bananas from a supplier in Honduras. The Honduran seller wants to be paid in US dollars. A bunch of ten bananas is currently selling for $20 each. The exchange rate is currently £1 = $1.75.Q1. How much does the UK buyer have to pay, in pounds, for each bunch of bananas?

◦ The exchange rate between the pound and the dollar changes. The pound has appreciated against the dollar and is now standing at £1 = $1.80.

Q2. How much will a bunch of bananas now cost the UK importer?

Q3. Given your answer to the question above, what do you think might be the effect on the UK importer of the change in the exchange rate?

A UK fruit wholesaler buys bananas from a supplier in Honduras. The Honduran seller wants to be paid in US dollars. A bunch of ten bananas is currently selling for $20 each. The exchange rate is currently £1 = $1.75. Q1. How much does the UK buyer have to pay, in pounds, for each bunch of bananas? £11.43

◦ The exchange rate between the pound and the dollar changes. The pound has appreciated against the dollar and is now standing at £1 = $1.80.

Q2. How much will a bunch of bananas now cost the UK importer? £11.11Q3. Given your answer to the question above, what do you think might be the effect on the UK importer of the change in the exchange rate?

Stronger £ reduces costs for the importer

The value of the UK pound against other currencies is called its exchange rate

Exporters prefer a weaker £ because it makes their products appear cheaper to foreign customers

Importers prefer a stronger £ because it lowers the price they have to pay suppliers

Explain in detail the meaning of import and export and why is it affected by exchange rates

(5 Marks)