Exchange Rates
- The exchange rate is the price of one currency in terms of another
- Most currencies use supply and demand to set their exchange rate
- Demand of the currency is determined by the demand of the goods and services of the country
- This, in turn, determines the appreciation or depreciation of the currency
Currency Appreciation
- The value of one currency rises and is able to buy more of another country’s currency than before
- Exporters have a serious problem when the currency of their country appreciates
- It could lead to fewer sales and exports
- Import prices to fall
Currency Depreciation
- The value of one currency falls and buys less of another currency than before
- Cost of production will rise
- Standard of living will fall
- Loss of foreign currency
- Everything becomes expensive
- Import prices to rise
- Export prices to fall
European Union
- It is an organization of 25 European countries
1. There is a single market within Europe:
- easier trade
- no barriers/controls on trade
- creates a huge market for goods and services
- economies of scale may occur
- increases competition amongst all European industries
- more consumer choice
- lower prices
- businesses have motivation to develop new and better products
2. Common Currency/ European Monetary Union (euro):
- fixed interest rates & supply of euro
- easier to calculate
- businesses won’t lose money through transactions
- less rivalry
- could lead to same taxation
3. Common Agricultural Policy:
- scheme to maintain the price of foodstuffs in Europe
- EU buys all excess food
- imports of agricultural products from outside EU have strict controls
4. Social Charter:
- aims to improve working conditions for European workers and create equality
- mobility of labor
- democratic leadership
- discrimination laws
- minimum/maximum hours
- laws of safety and health
- employee protection act
- forcers all employers to comply
- protection of children and disabled
- collective bargaining
- grants to unemployed
- finances retraining through social fund
5. Transport/Infrastructure/Communications
6. European Investment Bank:
- finance for small/medium businesses
7. Regulations on waste and pollution/noise levels
| Advantages of Joining the EU | Disadvantages of Joining the EU |
| Free trade to all markets of EU countries | Increased business cost since part-time workers would get the same benefits as full-time workers |
| Removal of border controls and lower administration costs | Maximum hours worked would be set |
| Bigger market | Increased competition with no import controls/protection |
| Potential for growth and economies of scale | Many EU controls over business activity through Social Charter |
| More market opportunities | |
| Exports of the business could increase | |
| More source of employees | |
| Greater competition | |
| More sources of finance | |
| Incentive and opportunity to become efficient | |
| Learn from other firms | |
| Same safety and technical standard for many products | |
| Ability to compete for contracts from member governments | |
| No exchange rate fluctuations | |
| Common laws and controls for all EU businesses |
| Advantages for UK Firms of Joining the Euro | Disadvantages for UK Firms of Joining the Euro |
| Lower costs- one price list only | More competition for UK firms |
| Lower cost- no price of converting currency | Consumers will be able to compare prices and choose the cheapest option which may not always be the UK firms |
| Easier to trade between countries | Interest rate may not suit the UK |
| Easier to compare costs- makes price differences more obvious | They won’t receive VAT anymore |
| No risk of losing out from exchange rate | They will have to adjust everything to euro |
| No differentiation | They will have to change their IT and stock control systems |
| Stability for businesses |
Free Trades Association
- A free trade association is a grouping of countries within which tariffs and non-tariff trade barriers between the members are generally abolished but with no common trade policy toward non-members
- Aims of reducing all barriers and limits on international trade
| Advantages | Disadvantages |
| allows every country to specialize | increased competition for firms |
| increased efficiency | no protection by government |
| prices will be competitive and not change by controls or import taxes | cannot ask for subsidies |
| helpful to developing nations since it helps them earn revenue | |
| more variety for consumers | |
| more opportunities for export | |
| increased sales | |
| living standards are likely to rise | |
| prices are likely to be kept low |
Globalization [World Trade]
- The process by which businesses or other organizations develop international influence or start operating on an international scale.
| Causes | Advantages | Disadvantages |
| free trade agreements | more jobs | unemployment |
| economic unions | variety of goods/services | social problems |
| reduced protection for industries | lower prices | less protection for firms |
| no import controls | efficiency | small businesses suffer |
| improved travel links and communications | merging/integration of firms | government cannot protect their home businesses |
| better infrastructure | easier to export/import | |
| easier to compare prices and quality of goods | specialization | |
| Internet | ||
| developing tiger economies creating tough competition |
Multinational Businesses [Transnational Businesses]
- Businesses with factories, production or service operations in more than one country
- They produce goods and services in more than one country
Reasons Behind MNC:
- globalization
- to produce in the countries with low cost
- to extract raw materials which the firm may need for production or refining
- to produce nearer to the market to reduce transport costs
- avoid barriers of trade
- expand into different market areas to spread risk
- near capital market
- less restrictive practices
- diversify assets
| Advantages of MNC Operating in a Country | Disadvantages of MNC Operating in a Country |
| Jobs are created | Jobs created are often blue-collar |
| New investments may increase output of country | All the skilled jobs are taken by home country |
| Increased exports | Local firms will suffer since MNC have lower cost and more efficiency |
| Reduced imports | Profits are sent back to the home country |
| Taxes fund the government | They use up scarce and non-renewable resources |
| More competition | Damage environment |
| Influence the government and economy- they may ask for large grants |
Business Studies IGCSE