Global Expansion and Competiveness

• Exchange rate fluctuations are a factor introducing uncertainty into international trade
• The exchange rate represents the price of one currency relative to another
• Like all prices, exchange rates are subject to change due to market forces and shifts in supply and demand
• Exchange rate changes impact businesses involved in exporting or importing

Appreciation and Revaluation

• Currency appreciation occurs when a nation's currency becomes stronger, allowing it to purchase more of another currency
• The pound's value against the euro experienced appreciation between early and mid-2015, rising from £1 = €1.27 to £1 = €1.41, marking a 12.5% increase
• A minority of countries operate with fixed exchange rates, which remain constant
• Governments can revalue their currency by raising the exchange rate to reflect a stronger valuation

Depreciation and Devaluation

• Currency depreciation happens when a nation's currency weakens, reducing the amount of another currency it can purchase
• The pound's value against the euro saw a sharp depreciation after the Brexit vote in June 2016, falling from £1 = €1.31 to £1 = €1.10 in just months, a 16% decrease
• Governments can devalue their currency when the exchange rate is fixed, making it weaker

Impact of Exchange Rate Appreciation on Businesses

• Exchange rate changes can influence demand for exports and imports by altering prices
• When the exchange rate increases from £1 = US$1.50 to £1 = US$2, a UK firm selling £2 million worth of goods to the US will see the dollar price rise from US$3 million to US$4 million, likely decreasing demand for UK exports due to higher costs
• If a UK firm buys US$600000 worth of goods from a US supplier, the price in pounds at the original exchange rate of £1 = US$1.50 is £400000
• When the exchange rate rises to £1 = US$2, the sterling price decreases to £300000, increasing demand for imports as they become cheaper

Impact of Exchange Rate Depreciation on Businesses

• A fall in the exchange rate has the opposite effect on export and import demand, and can impact businesses
• When the exchange rate decreases from £1 = US$1.50 to £1 = US$1.20, a UK firm selling £2 million worth of goods to the US will see the dollar price fall from US$3 million to US$2.4 million, potentially increasing demand for UK exports as they become more affordable
• US$600000 worth of goods from a US supplier at an exchange rate of £1 = US$1.50 costs a UK firm £400000
• When the exchange rate falls to £1 = US$1.20, the sterling price rises to £500000, decreasing demand for imports due to increased costs

Significance of Changes in the Exchange Rate on Business

• The impact of currency depreciation on a business depends on the price elasticity of demand for its products
• For goods with price-inelastic demand, a fall in price has a limited impact on quantity demanded
• For exports with price-elastic demand, there is a larger percentage increase in quantity demanded
• Australian exports may be price inelastic
• Appreciation due to improved efficiency is more sustainable than that due to speculation

Countering Exchange Rate Fluctuations with Fixed Contracts

• Businesses use fixed contracts to mitigate the impact of exchange rate fluctuations, offering a buffer against temporary changes
• Prices for raw materials are often set 12 to 18 months in advance, and exporters use financial instruments to protect against dramatic changes
• Fixed contracts reduce uncertainty but also create delays in the impact of exchange rate changes on business

Economic Risk

• Firms in international trade face economic risks from exchange rate movements
• Long-term risks arise when low-cost production areas appreciate in currency
• Firms that built factories in China in the 1990s, relying on the Chinese government's fixed exchange rate with the US dollar, saw their low-cost advantages diminish as the yuan appreciated
• Economic risk is defined as the risk that future cash flows will change due to unexpected exchange rate fluctuations
• Managing economic risk requires analysis of political, regulatory, and cultural environments
• The US dollar significantly influences international trade

Skills Shortages and Their Impact on International Competitiveness

• Many industries need to recruit skilled workers, and are facing skill shortages
• Skills shortages are present in the USA, Australia, New Zealand, Canada, and the UK
• Manufacturing sees a particular struggle in the recruiting of skilled workers
• If businesses cannot recruit skilled staff, international competitiveness is threatened

Main effects of skills shortages

• There is upward pressure on wages due to restricted supply of labour
• Quality of output may be negatively affected
• Lower levels of productivity due to production delays
• Loss of business if labour shortages continue for a long period