3.7.5 - Exchange rates, trade and the global economy
International economic changes affect both the prices businesses pay and the markets in which they compete. This lesson explains exchange-rate quotes and conversions, the implications of more open trade and protectionism, and how to combine UK and global data when judging opportunities and threats.
Exchange rates and business transactions
An exchange rate expresses one currency's value in another currency, so the direction of the quote must be clear before analysing a change.
Use US dollars per £1 here. If the rate rises from 1.50 per pound, sterling appreciates against the dollar: each pound buys more dollars. The rate rises by . A quote in pounds per dollar would move in the opposite numerical direction.
An importer buys a component for 1.20 and $1.50 per pound. The reciprocal relationship means the percentage cost change differs from the percentage change in the quote. Lower imported-input costs may improve margins or allow lower prices.
An exporter maintains a £5,000 selling price in the second example. Appreciation can weaken price competitiveness and demand, depending on customer sensitivity and rivals. If instead it holds a dollar price of $6,000, its sterling receipts fall from £5,000 to £4,000. Both the foreign price and sterling receipts cannot remain unchanged after this rate movement.
Worked example 1 - importing at a fixed dollar price
\text{Old cost}=$12{,}000\div1.20=£10{,}000
\text{New cost}=$12{,}000\div1.50=£8{,}000$$\text{Cost reduction}=\frac{£10{,}000-£8{,}000}{£10{,}000}\times100=20%$$
Worked example 2 - exporting at a fixed pound price
\text{Old dollar price}=£5{,}000\times1.20=$6{,}000$$\text{New dollar price}=£5{,}000\times1.50=$7{,}500$$
\text{Dollar-price increase}=\frac{$7{,}500-$6{,}000}{$6{,}000}\times100=25\%$$ The import cost and export price move by different percentages because one divides by the quote and the other multiplies by it. In its trading update of 24 January 2025 Burberry estimated that year-on-year exchange-rate changes would create a revenue headwind of about £65 million and an adjusted operating-profit headwind of about £25 million for that financial year. These were forecasts based on specified rates, rather than realised losses or proof of weaker demand. Currency conversion can change reported sterling results even when overseas sales in local currency are unchanged. [Burberry, January 2025](https://www.burberryplc.com/content/dam/burberryplc/corporate/documents/investors/results-reports/2025/Burberry%20Q3%20FY25%20Trading%20Update%20-%20Press%20Release.pdf.downloadasset.pdf). [DIAGRAM: asset_name: Appreciation and import-export prices; asset_slug: appreciation-import-export; caption: Sterling appreciation lowers the pound cost of a fixed-dollar import but raises the dollar price of a fixed-pound export; description: Two panels compare exchange rates of 1.20 and 1.50 US dollars per pound. A 12000-dollar import's sterling cost falls from 10000 to 8000 pounds. A 5000-pound export's dollar price rises from 6000 to 7500 dollars. Dollar import price and pound export price are held fixed, with no fees.]  Depreciation reverses these tendencies, but the net business effect depends on imported costs and exported revenue together. Contracts, invoicing currency, hedging arrangements, pricing decisions and timing can delay or offset changes. A firm importing inputs and exporting finished products may face opposing effects. Analyse its actual currency exposure, not simply label a stronger pound “good” or “bad”.More open trade and protectionism
More open trade reduces barriers to cross-border exchange, while protectionism restricts or discourages some international trade to protect domestic interests.
Barriers can include tariffs, quotas and administrative or product requirements that limit access. A tariff is a tax on imports; a quota limits the quantity allowed. Product rules can protect legitimate safety needs, so not every difference in regulation should automatically be called unjustified protectionism. A task should state the measure and the affected products.
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