Part 2 : EXCHANGE RATES

EXCHANGE RATES

Summarized by Anang P.Setiawan

Introduction

When goods and services are exchanged on an international level, payments have to be made in currencies. When currencies are exchanged in this way a rate of exchange has to be determined. This is done through the foreign exchange market and the ‘price’ of each currency will depend on the demand and supply of the currency relative to others.

This rate of exchange between currencies determines the price of exports and imports in their different markets.
e.g. £1=$1, if it then moves to £1=$2, UK exports to the USA will become twice as cheap. A rising exchange rate is bad for UK companies exporting and good for international exporting to the UK.

A government is able to influence these movements in the exchange rate in order to make the exchange more stable. This enable business to know the price of an export more accurately and this helps it to plan for the future.

The government can alter the exchange rate in three ways :
-It can buy and sell currency on the world market. Selling the currency would help to keep its level low.
-Altering the rate of interest will alter the demand for a currency. If the interest is lowered, then international financiers will move their money out of the country and into an economy with a higher rate of interest. This will lower the demand for the currency, increase supply and hence lower the price of the currency on the foreign exchange.
-The government can also help industry by entering a more stable exchange rate system. In fixed exchange rate schemes the price of a currency is fixed against other currencies, hence there is no uncertainty in exchange.

THE EUROPEAN UNION

Britain joined the European Union (formerly called the European Community) in 1973 in order to gain from free trade between the member countries.
There is a wide range of rules and regulations that are imposed on all firms trading in the EU. A common external tariff is placed on all imports coming into EU countries.

Since becoming a member of the EU, many regulations that affect business are monitored by the European Parliament rather than the British government. These include :
-Legislation to support free competition between firms.
-A guaranteed (fixed) price to farmers for most agricultural products.
-Additives in food, packaging and otehr legal/technical aspects.
-Location of business through the use of loans and grants available from the European Regional Development Fund.

In 2006 the EU had 25 member countries, as 12 countries (mostly from Eastern Europe) have recently joined.

THE EURO

On 1 January 1999 the Euro (€) became the official currency of 11 member states of the EU, with a fixed conversion rate into their national currencies. Greese became the 12th euro member in January 2001.

Euro notes and coins were not due to appear until 1 January 2002, but the new currency could be used before then by consumers, retailers, companies and public authorities in non-cash form. This meant that goods in the shops were priced in euros as well as the national currency.

Member countries also agreed to share a single interest rate, set by the European Central Bank (ECB) and a single foreign exchange rate policy. The Euro was set to have a major impact on the business environment both within these countries and throughout Europe.

Even though the UK did not join the single currency on January 1999, the introduction of the euro dirrectly affected many UK businesses. Especially those which buy and sell products throughout Europe. The euro will probably be used in some business transactions within the UK itself, particularly in supply chains dealing with multinational companies.

Key Terms

Balance of Payments : the value of exports from the UK minus the value of imports into the UK.
Euro : the single currency to be used for all exchanges in 12 member states of the European Union.
Exchange rate : the price at which one currency is exchanged for another.
Fiscal policy : the use of taxation and government spending to change the level of demand in the economy.
Invisible trade : the trade in services
Monetary policy : the use of policies to change the level and value of money and hence influence the economy through lowering inflation.
Monopoly : where one supplier controls the market. By law, a monopoly is defined as any firm that has more than a 25 per cent share of the market.
Regional policy : the use of grants and loans to influence the location of industry.
Visible trade : the trade in goods.

End of doc.

Government influence on Business Activity part 2 : International Trade

International Trade

Date : Monday, 23 March 2009

Summarized by : Anang P.Setiawan

Government will also able to influence the firms in the international market.
The ability of firms to trade and change currency is influenced by government policy.

We are unable to depend on from domestic producers for the goods and services we need to maintain our standard of living.
Manufacturers need to buy raw materials, semi-manufactured goods and services from abroad. Similarly consumer and producers from other countries by products from our country.
The measurement of the value of these flows of trade forms the balance of payments.

The balance of payments is the difference between the value of all our exports (goods and services sell to the international market) and imports (internationally goods and services purchased by the home market)

Trade in raw materials and manufactured goods is known as visible trade
Trade in services such as tourism, banking and insurance is known as invisible trade
The UK tends to have a trade surplus in invisibles ( sells more exports than buys imports)
The UK Trades defisit in visibles ( more imports than exports)

If a country imports more in total than it exports we have a balance of payment deficit. When this occurs, the government may intervene because :
-Industry will suffer as more imports are bought, employment levels will fall.
-The country will be losing strategically important industries such as shipbuilding and defence.
-New industries such as electronic or light engineering firms will not be able to establish themselves.

In order to help domestic industries the government may introduce controls on imports, such as :
-Tariffs – a tax on the imported goods. The tax makes the import more expensive so that home residents will be discouraged from buying it.

-Quotas – This sets a limit on the number of imports that can be allowed into the country.

-Trade embargos – This is where there is a ban on trade with a particular country or a particular good or service. It can be because of either political or social reasons.

End of Doc.

Presentation Assessment Information

Dear grade 9 students,

We will be having the presentation assessment on Monday 16 March 2009.
The topic is "Government Influence on Business Activity"

The Criteria of Assessment are :
Content : 30%
Performance : 30%
Creativity : 30%
Time Management : 10%
(The time given for each presentation is approx.10 minutes)

Rgrds,
Anang P.Setiawan, SE
Business Studies Teacher