e-Consult | Revision Qns

1.

(b) Consider the following scenario: A UK company exports goods to Germany. The exchange rate is currently £1 = €1.10. The Euro appreciates against the Pound. Explain how this change in exchange rate will affect the cost of the UK company's goods to German customers and the company's competitiveness.

When the Euro appreciates against the Pound, it means the Euro is stronger. This has the following effects:

Cost to German Customers: The cost of the UK company's goods to German customers will decrease. Because the Euro is stronger, German customers can buy more goods for the same amount of Euros.

Competitiveness: The UK company becomes more competitive in the German market. Lower prices make the goods more attractive to German consumers, potentially increasing sales volume. This can lead to higher market share and increased revenue for the company. However, the company may also face increased competition from German companies whose goods are now relatively more expensive in the UK market.

2.

Question 3: A company based in the UK imports components from Japan. The Japanese Yen has strengthened significantly against the Pound Sterling. Using an appropriate table, explain the potential effects of this exchange rate change on the company's costs and competitiveness.

Here's an analysis of the potential effects of a strengthening Japanese Yen on a UK company importing components from Japan, presented in a table format:

Effect	Description
Import Cost	The cost of the components purchased from Japan will increase. Since the Yen is stronger, it takes fewer Yen to buy the same amount of Pounds. Therefore, the company will need to spend more Pounds to acquire the same quantity of Yen-denominated components.
Production Costs	Higher import costs will directly increase the company's overall production costs. This is because the components are a key input into the final product.
Pricing Strategy	The company has several options. It could: Absorb the increased costs (reducing profit margins). Pass the increased costs onto the consumer (raising prices). Seek alternative suppliers (potentially at a higher cost or with different quality). The choice depends on the company's market position and the price elasticity of demand.
Competitiveness	The company's products may become less competitive if it raises prices significantly. Competitors who source their components from countries with weaker currencies may be able to offer lower prices. The company may need to focus on product differentiation or cost reduction to maintain competitiveness.

3.

(c) The government of Country X decides to devalue its currency. Explain two likely effects of this policy on the country's economy. Use specific examples to illustrate your points.

A currency devaluation is a deliberate reduction in the value of a country's currency. Here are two likely effects:

Increased Exports: Devaluation makes exports cheaper for foreign buyers. For example, if Country X devalues its currency, its goods become less expensive for countries like the UK or US. This increased affordability can lead to a rise in demand for Country X's exports, boosting export revenue and potentially improving the trade balance.
Example: If Country X exports cars, a devaluation would make those cars cheaper for UK consumers, increasing demand.

Increased Imports Cost: Devaluation makes imports more expensive. For example, if Country X devalues its currency, it will need to spend more of its currency to buy goods from other countries. This can lead to higher costs for businesses that rely on imported raw materials or components. This can contribute to inflation.
Example: A Country X manufacturer importing components from Japan would have to pay more for those components after a devaluation.

6.2.4 Exchange rates (3)