A level Business Revision - Exchange Rates

Summary

This 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

00:00

🌐 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.

05:02

📉 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.

10:03

🔄 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.

Keywords

💡Exchange Rate

The exchange rate refers to the value of one country's currency in terms of another's. It is a crucial factor for businesses operating in global markets, as it determines how much of a foreign currency they can obtain for their domestic currency. In the video, fluctuating exchange rates impact how much British businesses receive in pounds when they make sales in foreign currencies or when they pay suppliers in foreign currencies.

💡Fluctuation

Fluctuation in this context refers to the changes or variations in the exchange rate over time. Businesses are affected by these changes as they can alter the cost of imports and the revenue from exports. The video explains that when the pound fluctuates, it affects the amount of foreign currency that can be obtained for each pound, impacting the profitability of businesses.

💡Globalized Marketplace

A globalized marketplace is a term used to describe the economic environment where businesses operate across international borders, selling and sourcing products in different countries. The video emphasizes that many businesses now operate in such a marketplace, which makes them susceptible to exchange rate changes as they deal with multiple currencies.

💡Currency Appreciation

Currency appreciation is when a currency gains value relative to another currency. In the video, it is explained that when the pound appreciates, it becomes stronger, meaning businesses can get more of a foreign currency for each pound they exchange. This can affect the cost of imports favorably but may make exports less competitive in foreign markets.

💡Currency Depreciation

Currency depreciation is the opposite of appreciation, where a currency loses value relative to another. The video uses the example of a weak pound, where businesses receive less foreign currency for each pound, making imports more expensive but potentially making exports more competitive in foreign markets due to lower pricing.

💡Export

Exporting refers to the act of selling goods or services to another country. The video discusses how a fluctuating exchange rate can impact the strategy of businesses that export. For instance, a weak pound can make exports more price competitive, while a strong pound might require businesses to adjust their pricing strategies to remain competitive.

💡Import

Importing is the process of bringing goods or services into a country from abroad. The video explains that businesses that import are affected by exchange rate changes as it influences the cost of their inventory. A strong pound can make imports cheaper, while a weak pound can increase the cost of imported goods.

💡Profit Margin

Profit margin is a measure of how much profit a company makes relative to its sales. The video discusses how exchange rate changes can affect profit margins for businesses that export or import. For example, a strong pound might require exporters to lower their profit margins to maintain competitive pricing in foreign markets.

💡Price Competitiveness

Price competitiveness refers to the ability of a product or service to be priced competitively in the market. The video highlights that a weak pound can enhance the price competitiveness of exported goods, allowing businesses to lower their prices in foreign markets while still achieving the desired profit in their domestic currency.

💡Supply Chain

A supply chain is the network of organizations involved in the production and distribution of a product. The video suggests that businesses may need to adjust their supply chain strategies in response to exchange rate changes. For instance, a strong pound might encourage businesses to import more stock, while a weak pound might lead them to source domestically.

💡Cost Minimization

Cost minimization is a strategy where businesses aim to reduce their operational costs to improve profitability. The video discusses how exchange rate changes can lead businesses to consider cost minimization strategies, especially when they are affected by unfavorable exchange rates that increase the cost of imports or reduce the revenue from exports.

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