UNIT 6 - INTERNATIONAL TRADE AND EXCHANGE RATES

Businesses not only sell in this country but they sell to other countries as well. This is known as INTERNATIONAL TRADE.

• Goods sold abroad are known as EXPORTS
• Goods bought from abroad are known as IMPORTS

The main reason for businesses selling in other countries is to earn higher sales and profits by expanding their markets. This will also get their name known more widely round the world and improve their reputation.

There are problems involved with businesses trading abroad however:

· There are all the costs and possible difficulties associated with transport
· There may be differences in language and culture
· If the countries involved are not in the Euro there is the expense and trouble of exchanging currency and the uncertainties of changing exchange rates

EXCHANGE RATES

These show how much one currency is worth in terms of another currency.

CONCLUSION A DEVALUATION OF THE CURRENCY WILL MAKE EXPORTS CHEAPER AND SO INCREASE THEIR SALES.

This can also be seen from the point of view of IMPORTS.

If £1=$2 then $2,000 worth of American goods will sell for £1,000 in the UK.

If the exchange rate is devalued so that £1=$1 then $2,000 worth of American goods will sell for £2,000 in the UK.

CONCLUSION A DEVALUATION OF THE CURRENCY WILL INCREASE INFLATION in the UK BY INCREASING THE PRICE OF IMPORTS.

EXERCISE:

Imagine that the currency has not been devalued downwards but REVALUED upwards so that instead of £1=$2, £1=$3.

In the same way as above work out the effect on the price of UK exports and so the demand for them. Also the price of UK imports and inflation.

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