Learning objective
Explain how exchange rates can affect profits and sales for businesses that import.
Read the explanation, check the common trap, then practise with flashcards and questions.
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Flashcards
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Questions
Topic
Globalisation
Subtopic
Exchange rates
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Understand this objective
Quick explanation
Explain how exchange rates can affect profits and sales for businesses that import
- This point belongs to Globalisation, especially Exchange rates.
- You need to be able to explain how exchange rates can affect profits and sales for businesses that import.
- The key ideas to know are exchange rates, profit, and sales.
- Use the linked flashcards and practice questions to check recall, then practise applying the idea in an exam-style answer.
Key concepts
Why it matters
This objective helps connect Exchange rates to exam-style questions, flashcards, and revision notes for Globalisation.
Quick student answer
A small manufacturer imports raw materials costing €10,000. The current exchange rate is 1 GBP = 1.15 EUR. If the rate changes to 1 GBP = 1.05 EUR, calculate the change in the cost of the raw materials in pounds and the resulting effect on profit, assuming revenue is £20,000 and other costs are £5,000.
Direct answer
The cost rises by £828.16, reducing profit by £828.16.
How it works
Initial cost: €10,000 ÷ 1.15 = £8,695.65. New cost: €10,000 ÷ 1.05 = £9,523.81. Difference: £9,523.81 – £8,695.65 = £828.16. Profit before change: £20,000 – (£8,695.65 + £5,000) = £6,304.35. Profit after change: £20,000 – (£9,523.81 + £5,000) = £5,476.19. Profit falls by £828.16.
Key terms
- exchange rate: The rate at which one currency can be exchanged for another, indicating the relative value of the two currencies.
Common trap
Confusing sales with profit: Profit is sales minus total costs; higher sales increase profit only if costs do not rise proportionally.
Related questions
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Revision notestopic notes
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Open revision notesRelated learning objectives
- Explain globalisation and its effects on UK businesses.
International competition and globalisation
- Analyse benefits and drawbacks of globalisation for UK businesses.
International competition and globalisation
- Explain how UK businesses may compete internationally through better design, higher quality and lower prices.
International competition and globalisation
- Explain how exchange rates can affect profits and sales for businesses that export.
Exchange rates