A UK exporter sells a machine for £20,000. State its price in euros when £1 = €1.20, and when sterling falls to £1 = €1.08.

The machine costs €24,000 at the first rate and €21,600 at the second.

Explain the acronym SPICED as it applies to exchange rates.

Strong Pound, Imports Cheap, Exports Dear: an appreciation lowers the domestic price of imports and raises the foreign price of exports.

Why might a depreciation fail to improve the current account immediately?

Contracts and order books are fixed in the short run and demand takes time to respond, so at first the country pays more for the same volume of imports and the deficit widens before it improves, which is the J-curve effect.

State the Marshall-Lerner condition.

A depreciation improves the current account only if the price elasticities of demand for exports and for imports sum to more than one.

Edexcel A-Level Economics B 9EB0

Scarcity, Choice and Potential Conflicts

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Enterprise, Business and the Economy

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Globalisation

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Globalisation

Exchange rate changes and the Eurozone

3 things to know
Papers 2 and 3

Overview

Exchange rates, depreciation against devaluation, calculating export prices, SPICED, why depreciation may not improve the current account at once, the Marshall-Lerner condition, imported components, cost-push and demand-pull inflation, appreciation and employment, foreign direct investment, the Maastricht convergence criteria, the benefits and costs of the Eurozone, and asymmetric shocks.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

How can a depreciation cause demand-pull inflation?

Key term

Define an exchange rate.

Key term

What is the difference between a depreciation and a devaluation?

Questions from this subtopic

Each one with the model answer underneath.

1
Define an exchange rate.
Model answer
An exchange rate is the price of one currency expressed in terms of another.
2
What is the difference between a depreciation and a devaluation?
Model answer
A depreciation is a fall in a floating currency's value brought about by market forces, while a devaluation is a deliberate reduction in the official value of a fixed or pegged currency by the authorities.
3
A UK exporter sells a machine for £20,000. State its price in euros when £1 = €1.20, and when sterling falls to £1 = €1.08.
Model answer
The machine costs €24,000 at the first rate and €21,600 at the second.
4
Explain the acronym SPICED as it applies to exchange rates.
Model answer
Strong Pound, Imports Cheap, Exports Dear: an appreciation lowers the domestic price of imports and raises the foreign price of exports.
5
Why might a depreciation fail to improve the current account immediately?
Model answer
Contracts and order books are fixed in the short run and demand takes time to respond, so at first the country pays more for the same volume of imports and the deficit widens before it improves, which is the J-curve effect.
6
State the Marshall-Lerner condition.
Model answer
A depreciation improves the current account only if the price elasticities of demand for exports and for imports sum to more than one.

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ABorrowing becomes dearer and saving more rewarding.

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