Page 338 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 6 External influences on business activity

EXPLORE!
Find out the exchange rate of your country’s currency with respect to the United States
dollar. Analyse the fluctuations in the exchange rate between the two currencies for the
last 3–5 years. What do you think has contributed to the changes?

ACTIVITY 26.4

Georg Godby, the owner of a growing retail company in Germany, is travelling to Sri Lanka

TOP TIP on a business trip. When travelling, he carries different currencies with him and then
You must learn how move ments exchanges some of them for the local currency of the country he is going to. The local
in the exchange rate aff ect currency in Sri Lanka is the Sri Lankan rupee (LKR).
companies. You will be expected
to know how, for example, an
Amount of LKR obtained for 250
appreciation of the currency will
Currency Exchange rate units of currency being exchanged
affect the prices paid by importers

and exporters. How will this USD 1 USD = 127 LKR 31,750

affect their sales and profit? Note
GBP 1 GBP = 197 LKR
the impact of price changes is

different depending upon whether
Euro 1 euro = 166 LKR
the business is an importer or
an exporter. Acronyms are a
useful way to help you remember 1 Copy and complete the table above.
ideas. For example: for this you 2 Which currency should Georg change to local currency? Which currency has a
could think of ‘MADE’ – iMporters favourable exchange rate and gives him the most Sri Lankan rupee?
benefit from Appreciation, while a
336 Depreciation benefits Exporters in
terms of lower prices.
Depreciation and appreciation of an exchange rate
Exchange rate changes can have a signifi cant effect on a business in terms of

sales, costs and profits. Changes in exchange rate affect the level of exports and
imports. This in turn can have an effect on the whole economy. Let’s examine

KEY TERM the impact of appreciation and depreciation of the exchange rate.
Depreciation: a currency is said Effect of depreciation of currency on exporters

to depreciate if the value of the
A currency is said to depreciate if the value of the currency goes down in relation to
currency goes down with respect
to another. another currency. When this happens, the exchange rate of that currency falls. Figure

26.2 explains how a fall in exchange rate affects businesses and the country as a whole.
Impact on Impact on
businesses country

Impact on Impact on • If a lot of raw materials and • More demand for its currency
importers exporters semfinished goods are imported thus value of currency rises.
then it could trigger inflationary • More exports may lead to
• Imports will appear to be • Exports are relatively cheaper pressure on the economy. increase in balance of
more expensive. overseas; this should increase payments.
• Businesses which rely on the demand for them.
imports will have to pay more. • Businesses which export will
benefit from increased sales.

Figure 26.2 Effects of exchange rate depreciation