A level Business Revision - Exchange Rates
Summary
TLDRThis video explores the impact of fluctuating exchange rates on businesses, focusing on how they affect both importers and exporters. A weak pound benefits exporters by making their products more competitively priced in foreign markets, while importers face higher costs for foreign goods. Conversely, a strong pound can make exports less competitive but benefits importers by allowing them to purchase more foreign inventory for the same amount of money. Businesses must adapt their strategies based on exchange rate movements, potentially focusing on domestic markets during a strong pound or seeking cost minimization when the pound is weak.
Takeaways
- 🌐 Businesses are affected by exchange rates due to operating in a globalized marketplace, where they sell products abroad and source inventory from different countries.
- 💷 A fluctuating exchange rate impacts how much a business receives in its home currency when converting foreign currency sales and payments.
- 📈 When the British pound appreciates, it becomes stronger, allowing businesses to command more foreign currency, which can be beneficial for importers.
- 📉 Conversely, a depreciating pound means it gets weaker, potentially making exports more competitively priced in foreign markets but less favorable for importers.
- 🔁 Exporters can benefit from a weak pound as they can lower their prices in foreign markets while still achieving the same profit in their home currency.
- 🛒 Importers are negatively affected by a weak pound because they get less foreign inventory for each unit of their home currency spent.
- 🔄 Exchange rate changes prompt businesses to reconsider their strategies, such as focusing on domestic markets when the home currency is strong or seeking growth in foreign markets when it's weak.
- 🏭 For businesses that both import and export, a strong pound can be advantageous for buying raw materials but disadvantageous for selling finished goods abroad.
- 💼 Businesses may need to adjust profit margins or explore cost-minimization strategies to remain competitive when their home currency appreciates or depreciates.
- 🌟 The video emphasizes the importance of understanding exchange rates and their impact on business strategies for both importers and exporters in a global economy.
Q & A
Why are businesses affected by exchange rates?
-Businesses are affected by exchange rates because they often operate in a globalized marketplace, selling products abroad and sourcing inventory from different countries. The conversion between foreign currencies and the home currency impacts their profits and costs.
How does a strong pound impact a business that exports products?
-A strong pound can negatively impact exporters because their products become less price competitive in foreign markets. They may need to increase prices abroad to maintain profit margins when converting back to pounds, potentially reducing demand.
What is the advantage for businesses that export when the pound is weak?
-A weak pound can be advantageous for exporters as it allows them to lower their prices in foreign markets while still achieving the same profit in pounds when converting the foreign currency back to pounds.
How does the exchange rate affect businesses that import stock from abroad?
-For importers, a strong pound means they can get more foreign currency for their pounds, allowing them to purchase more stock. Conversely, a weak pound results in getting less stock for their pounds, increasing costs.
What strategies might a business consider when the pound is weak and they are an exporter?
-When the pound is weak, an exporting business might consider expanding into foreign markets or increasing production for overseas to take advantage of the competitive pricing due to the favorable exchange rate.
How should a business that imports react to a strong pound?
-A business that imports should consider stockpiling or increasing imports when the pound is strong as they can get more value for their currency. They might also look to foreign suppliers more seriously as an alternative to domestic sourcing.
What challenges does a weak pound pose for import-dependent businesses?
-A weak pound poses challenges for import-dependent businesses as they get less foreign currency for their pounds, leading to higher costs for the same amount of stock. This may necessitate cost-cutting strategies or reconsidering supply chain management.
How can a business that both imports and exports be affected by exchange rate fluctuations?
-A business that both imports and exports can be affected by exchange rate fluctuations as they face higher costs for imports when the pound is weak and potentially lower demand for exports when the pound is strong, impacting both their cost of goods sold and sales revenue.
What strategic changes might a business consider when the pound appreciates?
-When the pound appreciates, a business might consider focusing more on the domestic market, adjusting profit margins, or looking for ways to minimize costs in other areas of the business to compensate for the reduced competitiveness of their exports.
How does the exchange rate influence a business's decision to source locally versus internationally?
-The exchange rate influences sourcing decisions as a strong pound may encourage businesses to import more due to the favorable conversion rate, while a weak pound might push them to source locally to mitigate the higher costs associated with importing.
What steps can businesses take to mitigate the risks associated with fluctuating exchange rates?
-Businesses can hedge against exchange rate risks through forward contracts, options, or other financial instruments. They may also diversify their markets, adjust pricing strategies, or optimize operational efficiencies to mitigate the impact of currency fluctuations.
Outlines
🌐 Impact of Exchange Rates on Businesses
This paragraph introduces the concept of exchange rates and their significance to businesses operating in a globalized market. It explains how businesses are affected by exchange rates, particularly those that export and import. Exporters need to convert foreign currency earnings back into their home currency, while importers must convert their home currency into foreign currency to pay for goods. The paragraph sets the stage for understanding how exchange rate fluctuations can impact a business's bottom line, whether through increased or decreased profits from foreign sales or the cost of imported goods.
📉 The Effects of a Weak Pound
The second paragraph delves into the specific effects of a weak pound on businesses. It discusses how a weak pound can benefit exporters by making their products more competitively priced in foreign markets, as they can lower their prices abroad while still achieving the desired profit in their home currency. Conversely, importers face challenges as a weak pound means they get less foreign currency for their money, increasing the cost of imported goods. The paragraph uses the example of a biscuit manufacturer to illustrate these points, highlighting the strategic considerations businesses must make in response to currency fluctuations.
🔄 Strategic Responses to Exchange Rate Changes
The final paragraph explores how businesses might adjust their strategies in response to changes in exchange rates. It suggests that a weak pound could encourage businesses to focus more on exporting, as it makes their products more price-competitive abroad. Conversely, a strong pound might lead businesses to concentrate on domestic markets or seek ways to maintain competitiveness in foreign markets, possibly by accepting lower profit margins. The paragraph also touches on how importers might respond to a strong pound by increasing imports or considering domestic suppliers. It emphasizes the need for businesses to be flexible and strategic in their approach to managing the impact of exchange rate fluctuations.
Mindmap
Keywords
💡Exchange Rate
💡Fluctuation
💡Globalized Marketplace
💡Currency Appreciation
💡Currency Depreciation
💡Export
💡Import
💡Profit Margin
💡Price Competitiveness
💡Supply Chain
💡Cost Minimization
Highlights
Businesses are affected by exchange rates due to operating in a globalized marketplace.
Exporters need to convert foreign currency profits back to their local currency.
Importers have to convert local currency to pay for foreign stock.
A strong pound means it commands more of a foreign currency.
A weak pound means it gets less foreign currency for each pound.
A weak pound can be advantageous for exporters as their products can be more price competitive.
Exporters can afford to drop prices for foreign customers and still make the equivalent profit.
A strong pound can make exporting less attractive as products become less price competitive abroad.
Importers benefit from a weak pound as they get more stock for their money.
A strong pound might encourage businesses to import more stock and inventory.
Businesses need to rethink strategies as exchange rates fluctuate.
Exporters might maximize production for overseas markets during a weak pound.
Importers might look inward for suppliers when the pound is weak.
Businesses might consider stockpiling when the pound is strong.
Firms might need to adjust profit margins to remain competitive as the pound strengthens.
Cost minimization strategies may be necessary when the pound is weak and import costs are high.
Exchange rates impact both importers and exporters, requiring businesses to balance their strategies.
Transcripts
[Music]
welcome along to taking the bid in this
video we're going to take a look at a
topic called exchange rate and we're
going to try and work out how
fluctuating exchange rate might have an
impact on businesses and the strategies
that they pursue
so that's wonder Stan the interest rates
we need to understand first of all why
businesses are even affected by interest
rates and that's because many businesses
now operate in a globalized marketplace
which means a couple of different things
many businesses seek a lot of custom are
a lot of sales from selling their
products abroad now when you sell
products abroad you can't sell them in
UK pounds you've got to price them up in
whatever the currency is in the market
where you are active so your customers
will pay you in that foreign currency
but then you want to bring those profits
at home and you want to distribute them
to your shareholders and your
shareholders are not going to want to be
rewarded in foreign currencies so you've
got to convert money from the currency
in the market that you produce in back
into the currency of where you are based
and so your business is impacted by
exchange rates because as the exchange
rate changes and fluctuates it's
affecting how much you get in pounds
when you make sales in foreign
currencies but also as well as being
exporters many British businesses source
some of their stock or their inventory
from abroad now when you're buying stock
from foreign suppliers they're not going
to want to be paid in pounds either if
you're sourcing stock from a Chinese
supplier they're going to want to be
paid in their local currency not in
pounds so again you're going to have to
transfer some of your English funds into
a foreign currency and how much of that
foreign currency you get for each of
your pounds changes as exchange rates
fluctuate so in this video we're going
to try and have a look at how businesses
are affected in different ways
as currencies appreciate and depreciate
and appreciating currency we talk about
the pound the pound appreciates it means
it gets stronger and it commands more of
a foreign currency when we change it if
the pound depreciate it means it gets
weaker and it means you can't get as
much foreign currency for each one of
your great British pounds so up here we
have a little scenario that explains
just the difference between a weak pound
and a strong pad so when the pound is
strong if we compared it to say the US
dollar a strong pound would fetch us a
lot of US Dollars so everyone that we
traded in might be able to be swapped or
transferred into say one dollar sixty so
you get a lot of dollars for each of
your pounds when that pound is weaker we
get less dollars for a pound maybe we
only get one dollar and ten cents for
every pound that we transfer in two
dollars so we've got our strong and weak
pounds now businesses are affected by
strong pounds and by weak pounds let's
start with a weak pound first of all a
weak pound sounds bad it sounds negative
but that's not necessarily the case for
all the UK firms if you are a firm that
exports your product to abroad as
imagine that we were a business that
manufactured biscuits and we've just
taken the decision that we want to start
selling these biscuits internationally
and the first market we want to
penetrate is the American market because
we all know that those guys are mad
about their biscuits so when we sell our
biscuits in the UK and we sell them in
supermarkets up and down the country we
charge one pound for them and when we're
going to start selling them in America
we want to try and achieve the same kind
of profit margin so we want to set a
price that when we convert our American
sales back into pounds is still going to
achieve as one pound that's how much we
want to be able to transfer our American
sales back into or here's the thing the
we're going to have to charge American
customers is going to change as the
exchange rate fluctuates if we're intent
on always making the equivalent of a
pound from each of our American sales so
when the pound is particularly weak we
only need to charge American customers
one dollar and ten cents and when we
convert that back into UK currency we've
made our pound per sale but only if the
exchange rates change and if the pound
strengthens then if we still want to
make a pound every time we sell a pack
of our biscuits to American customers
we're going to have to up our prices so
if the exchange rate is one pound is the
equivalent of one dollar sixty then
we're going to have to increase our
prices from one dollar ten to one dollar
sixty as the exchange rate increases if
we want to preserve making one pounds
profit selling to an American customer
so when we have a weak pound it can
actually be advantageous to firms that
export it means that their products can
be more price competitive in overseas
markets purely because of what the
exchange rate is the organization can
afford to drop its prices for its
foreign customers and still make the
equivalent of a pound through selling
its biscuits so we found very good for
exporters but not so good for importers
of stock from abroad imagine we've got
another biscuit manufacturer that
doesn't export abroad but does import
flour from America now this time as an
importer of inventory how much flour
they get for each of their pounds is
going to vary or fluctuate with the
exchange rate this time the wheat pan is
actually harmful to the organization's
it was good if you were an exporter of
your product abroad but a wing pan means
that you end up getting less stock less
inventory but each one of your British
pounds that you want to transfer over to
your foreign suppliers so
when the pound is quite weak and it's
only worth $1 10 and for each pound we
pay our American supplies with we're
only going to get $1 10 worth of flour
worth of stock but when the exchange
rate fluctuates in the pound appreciates
it becomes a stronger currency we might
in a few months or years time be able to
get $1 60 worth of flour still just for
a pound so as the exchange rate
fluctuates it makes a difference to
firms not just who export and it affects
the prices they might sell at but it
also affects businesses that import
stock and it affects how much stock they
get for their money
now accordingly as exchange rates change
businesses need to think about their
strategies first of all when the pound
is quite weak it makes exporting
attractive to organizations
so maybe firms that have never exported
abroad before as the pound depreciate it
becomes a weaker currency it might mean
that they start to think about that as a
strategy that's become more attractive
to them so they might start seeking out
foreign markets for growth rather than
concentrating purely on domestic markets
the firm's that are already exporters
they might want to maximize the amount
of production that they're producing for
overseas markets compared to what
they're producing for domestic market
because when we have that weak Pound
firms can sell their products abroad for
a lower price in that country and still
achieve the same equivalent sales price
in the UK so it makes the strategy of
overseas growth and expansion more
attractive to businesses but when we do
have that strong pound it does make
businesses think about their strategies
in terms of exporting once more because
a stronger pound means that that exports
are going to be less price competitive
in overseas markets so this time firms
might change their strategy they might
think about concentrating more on their
domestic markets foreign markets might
become less attractive
because you're going to have to command
a higher price in foreign market to make
the same equivalent amount of money when
you can transferring it back into great
British press so you might want to tweak
your strategy you might want to refocus
domestically or if you are going to
continue to focus on sales abroad as a
key part of your strategy and the pound
has strengthened maybe your business
needs to think about its profit margins
in order to read to remain price
competitive in foreign markets even as
the pound is appreciating and becoming
stronger the business might just have to
settle for the fact it's going to have
to make lower profit margins so maybe
because of the elasticity of the product
that the business sells the price
elasticity of the product of the
business sells they don't think that
they can justify passing on additional
higher prices to consumers so the firm
might need to absorb the rise in
exchange rate itself and just be content
with lower profit margins which might
open up other strategies that the
business has to think about as well
maybe decisis got a try and cost
minimizing other areas of the business
because its profit margins are being
squeezed by the fact that the pound has
appreciated in value and that the
business doesn't feel it can justify
passing that on to foreign consumers in
the form of higher prices if we have the
importers of stock and inventory again
as exchange rates change it makes them
think about their strategies first of
all when the pound is strong it makes
businesses perhaps think about
stockpiling or importing more stock and
inventory because they can get more for
their money when the pound is strong or
if we've got a firm that has
traditionally bought its stock
domestically from other UK producers a
strong pan might encourage more of those
to look at importing stock rather than
buy it domestically because maybe
foreign suppliers become more
competitive when we have a strong pan
because we can get more for our money
but when we have that weak pound we're
getting less stop for our money from our
over
see suppliers so it might make us look
inwardly it might make us look at
domestic producers domestic suppliers
that we might be able to source from it
might mean firms perhaps tweaking their
supply chains and getting more of their
stock from home because the exchange
rate has now penalized them and they
can't get as much stock for their money
if a firm is absolutely reliant on a
foreign supplier that might not be an
option for them so again firms might
need to look at strategy surrounding
cost minimization because if you've got
to buy your stock from abroad that's the
only place that you can get it from but
the pound is quite weak so you're not
getting very much stock from your money
anymore you might need to look at where
else you can strip costs from your
business be it some aspect of marketing
be it some aspect of HR such as training
via trying to drive productivity and
efficiency in the organization it might
mean that you pursue those kind of
strategies because you've got to buy
stock from abroad but now you're not
getting very much for your money so
exchange rates are a key part of
determining businesses strategies how it
affects your strategies and how you're
affected by exchange rates depends on
whether you are an importer of stock
whether you are an exporter of your
goods abroad one thing to bear in mind
is that many firms are bunks so they
import raw materials from abroad they
manufacture and then they sell those
finished goods to foreign markets as
well so the Veii can be affected by both
strong and weak pounds because they're
both importers of stock and exporters of
finished goods hopefully that helps you
out when it comes to exchange rates good
luck with your revision keep on taking
the biz seriously
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