Globalisation and exchange rates
AQA also says:
Spec content: How UK businesses compete internationally (better designs, higher quality products at lower prices); Exchange rates.
Students should be able to: demonstrate knowledge and understanding of globalisation and the benefits and drawbacks that it offers UK businesses; understand the impact of exchange rates on the profit and sales of businesses that import and/or export. Students will not be asked to calculate exchange rate conversions.
Globalisation
Globalisation is the process by which businesses, markets, and economies around the world have become increasingly interconnected and interdependent. Goods, services, capital, and people move more freely across national borders than ever before. For UK businesses, globalisation creates both opportunities and threats.
Benefits of Globalisation for UK Businesses
- Access to larger markets — UK businesses can sell to customers in markets across Europe, North America, Asia, and beyond. A UK manufacturer that would be a niche player domestically can become a significant supplier globally.
- Lower input costs — businesses can source raw materials, components, and labour from countries where they are cheaper, reducing production costs and improving competitiveness.
- Access to new ideas and talent — globalisation enables businesses to recruit the best talent from anywhere in the world and benefit from international innovation and technology.
Challenges of Globalisation for UK Businesses
- Increased competition — UK businesses now compete not just with other UK firms but with international competitors, including businesses from countries with lower labour costs. This can make it difficult for UK firms to compete on price alone.
- How UK businesses must respond — AQA specifically identifies two competitive strategies: offering better designs (competing on innovation, quality, and distinctiveness rather than price) or producing higher quality products at lower prices (achieving cost efficiencies through technology, scale, or process improvement).
Exchange Rates
An exchange rate is the value of one currency expressed in terms of another. For example, if £1 = €1.15, a UK business selling to a European customer at €115 would receive £100. Exchange rates fluctuate constantly, and these fluctuations directly affect the competitiveness and profitability of businesses that import or export.
Effect of a Strong Pound (£ rises in value)
- Exporters suffer — UK goods become more expensive in foreign currency terms. A UK manufacturer selling a product at £1,000 would receive more euros/dollars per unit when the pound was weak. When the pound strengthens, the same product costs more in foreign currency, potentially making UK exporters uncompetitive.
- Importers benefit — foreign goods and materials become cheaper in pound terms. UK businesses that import raw materials or components from overseas see their input costs fall, improving profit margins or enabling price reductions.
Effect of a Weak Pound (£ falls in value)
- Exporters benefit — UK goods become cheaper in foreign currency, boosting international competitiveness and demand for UK exports. UK tourism also benefits as the UK becomes a cheaper destination for overseas visitors.
- Importers suffer — imported materials and goods become more expensive in pound terms, increasing input costs for businesses that rely on overseas suppliers. This can squeeze profit margins or force price increases for consumers.
Key Takeaways
- Globalisation gives UK businesses access to larger markets and lower costs, but brings increased international competition.
- UK businesses compete globally by offering better designs or higher quality at competitive prices.
- A strong pound: bad for exporters (UK goods more expensive abroad), good for importers (foreign inputs cheaper).
- A weak pound: good for exporters (UK goods cheaper abroad), bad for importers (foreign inputs more expensive).
- Exchange rate fluctuations are beyond any individual business's control — businesses must plan for and manage the risk.