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Reading 7: The foreign exchange market (Currency value (STRONG (High…
Reading 7: The foreign exchange market
Currency value
Supply & Demand forces
Foreign exchange market
STRONG
High demand
Fall in supply
Good for UK importers
WEAK
Low demand
Good for UK exporters
Demand from abroad £s
Foreign investors
Overseas importers
High £ value decreases demand - goods more expensive
Demand = downward sloping curve
Steep gradient
price inelastic
Demand less affected by price change (change in ER)
Slope
Price elastic
Demand greatly affected by price change (change in ER)
Supply of £s to foreign currency market
Demand
Travel
Imports
Price elastic
Total spending on imports increases
Significant increase increases overall amount spent
Upward sloping curve
Higher value £ increases quantity supplied
Price inelastic
Lower price = small increase in quantity demanded = fall in total spend
Downward-sloping curve
Increase in £ value
Increased purchasing power abroad
Foreign goods cheaper
Equilibrium
Free market - currency price adjusts until supply = demand
Excess supply, ER falls
Excess demand, ER increases
Shifts in currency demand
Increase in UK interest rates
Foreign investors
Speculators buy to sell
Increase in overseas income
Increase in demand = increase in price = increase in equilibrium
#
Shifts in currency supply
Increase in overseas interest rates
Speculators selling
Increase in UK incomes
Decrease in supply = increase in price = fall in equilibrium
#
Organisational impact
£ falls
=
export
Maintain UK price
Demand increases
Economy stimulated
Maintain currency price
increase profit margins
£ increases
Maintain UK price
Sales reduction
Maintain currency price
Reduced profit margins
Import
£ falls
Imports more expensive
£ increases
Higher margins
Able to reduce prices
Customers may switch to overseas producers
McBurger Index
Used to identify long-term underlying currency value
Currency affected by speculators or government policy