Page 339 - Cambridge IGCSE Business Studies

26: Business and the international economy

EXAMPLE

Jing Chen is in the garment business in Singapore. He exports garments from Singapore to the USA. If the exchange
rate between the Singapore dollar (SGD) and US dollar is 1 SGD = 0.78 USD, an export of garments from Singapore
worth SGD 1,000 will cost 780 USD (to an importer in the USA).
If the SGD depreciates and the exchange rate falls to 1 SGD = 0.71 USD then an export of 1,000 SGD costs
710 USD (to an importer in the USA). So the depreciation in the exchange rate leads to a decrease in export
prices in other currencies. Since exports are relatively cheaper overseas, this should increase the demand for
them by importers.

KEY TERM Effect of appreciation of currency on exporters
A currency is said to appreciate if the value of the currency increases with
Appreciation: a currency is said respect to another. When this happens, the exchange rate of that currency rises.
to appreciate if the value of the

currency increases with respect to The table below explains how a rise in exchange rate affects businesses and the
another currency. country as a whole.

Impact on Impact on
businesses country

Impact on Impact on • More imports may lead to • A fall in exports may result in
importers exporters decrease in the balance of a fall in GDP and unemploy- 337
payments. ment in the affected sectors.
• Imports will appear to be • Exports are relatively more • Local businesses compete with
cheaper. expensive overseas; this may cheaper imported goods and
• Businesses selling imported decrease their demand. reduce costs and selling price.
goods or relying on imported • Businesses which export may This may reduce inflation.
raw materials will benefit from suffer from reduced sales; if so
reduced costs. then exporters may choose to
cut their prices, reduce output
and cut back employment
levels.
Figure 26.3 Effects of exchange rate appreciation

EXAMPLE

Let’s return to Jing Chen and his garment business in Singapore. He exports garments from Singapore to the USA. If the
exchange rate between the Singapore dollar (SGD) and US dollar is 1 SGD = 0.78 USD, an export of garments from
Singapore worth SGD 1,000 will cost 780 USD (to an importer in the USA). If the SGD appreciates and the exchange rate
rises to 1 SGD = 0.81 USD then an export of 1,000 SGD costs 810 USD (to an importer in the USA). So appreciation in
exchange rate leads to an increase in export prices in other currencies. Since exports are relatively more expensive
overseas, this may decrease the demand for them by importers.

An appreciation in exchange rate makes it harder to sell overseas. Essential items

generally do not get affected by fluctuations in exchange rate.