Impact of Exchange Rate on Businesses

Definition of Exchange Rate

• An exchange rate is the value of one currency for conversion to another.
• It dictates how much one country's currency is worth in terms of another currency.

Effects of a Weaker Pound

Increased Export Competitiveness

• British goods become cheaper for foreign buyers.
• Example: A US company finds British cars cheaper when the pound falls against the dollar.

Cost of Imports

• The cost of imported raw materials increases.
• Example: A UK chocolate maker faces higher costs when importing cocoa.

Impact on Production Costs

• Raw material costs rise if sourced from abroad.
• This may lead to increased prices for consumers.
• Example: British furniture makers may increase prices due to more expensive wood imports.

Price Adjustments

Passing on Costs

• Businesses might pass increased production costs to customers.
• Example: A British electronics firm may increase the price of gadgets due to higher import costs of components.

Absorbing Costs

• Some businesses may choose to absorb the costs to maintain prices.
• Can affect profit margins negatively.

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Impact of exchange rate on businesses

Overall Business Impact

Profitability

• A weak pound can lead to improved export sales but decreased profit margins due to higher import costs.

Strategic Decisions

• Businesses may need to reassess sourcing and pricing strategies.
• Example: A UK brewer may source barley domestically instead of importing to avoid higher costs.