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Exchange Rates

Goods and services are sold to foreigners who have to buy ús in order to purchase them.  Imports occur when UK residents buy goods and services from abroad. 


The Effect of Exchange Rates

The value of exchange rates affect the demand for exports and imports.  An appreciation of the pound (pound becomes stronger) will lead to exports becoming more expensive and imports cheaper.  This will harm exporters and increase the leakages from the circular flow of income. Were the pound to depreciate the opposite effect would occur.  In order to avoid confusion remember SPICED!










The economic effects of changes in exchange rates take time to occur, this is due to time lags between a change in the pound and changes in the balance of payments.


Trends in Exchange Rates


The last major depreciation in the value of sterling came in the early-mid 1990s following sterling's departure from the exchange rate mechanism. The pound was devalued by nearly 15% against a range of currencies in September 1992 and continued to drift lower in value for the next three years.




E-mail Steve Margetts