Exchange Rates: A Must-Know Guide for GCSE & A-Level Business Studies/Economics Students

By Legacy Chain Ltd

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Ever noticed how your family’s holiday money buys more (or less) than before? That’s all down to exchange rates — a key topic in GCSE & A-Level Business and Economics. Let’s break it down!

Firstly... What is an Exchange Rate?

An exchange rate is the value of one currency compared to another.For example, if £1 = $1.25, 1 British pound can be exchanged for 1.25 US dollars.

Types of Exchange Rate Systems

1. Floating Exchange Rates – Change based on supply and demand, without government interference.

2. Fixed Exchange Rates – Set and maintained by a central authority.

3. Managed Exchange Rates – A combination where governments intervene when necessary.

What Affects Exchange Rates?

• Interest Rates – Higher rates attract investment, increasing currency value.

• Inflation – Lower inflation keeps a currency stable.

• Economic Growth – A strong economy boosts investor confidence.

• Trade Balance – More exports than imports can strengthen a currency.

• Speculation – If traders expect a rise, they buy more, increasing value.

• Government Policies – Central banks influence rates through monetary policy.

Why Do Businesses Care?

Imports & Exports

• A stronger pound makes imports cheaper but exports more expensive.

• A weaker pound makes exports cheaper but increases import costs.

Business Costs & Profits

• Importing businesses face higher costs if the pound weakens.

• Exporters benefit when the pound drops as their products become more affordable internationally.

Inflation & Prices

• A weaker currency increases inflation as imports cost more.

• A stronger currency reduces inflation by making imports cheaper.

  
  

Real-World Examples

• Brexit (2016): The pound fell, making UK exports cheaper but increasing import costs.

• COVID-19: Economic uncertainty led to major fluctuations in exchange rates.

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Why This Matters for Your Exams

Understanding exchange rates helps you:

• Analyse case study questions on international business.

• Evaluate how currency changes affect economies and businesses.

• Use real-world examples to strengthen your exam answers.

Need Extra Help? We’ve Got You Covered

At The Legacy Chain Ltd, we make complex topics simple. Our expert tutors help GCSE & A-Level students master Business and Economics with clear explanations and exam strategies.

📩 Book a session today and take control of your grades!