ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A UK company that imports components priced in US dollars finds that sterling has depreciated against the dollar. What is the most likely immediate effect on the company?
The sterling cost of the imported components rises. Depreciation means each pound buys fewer dollars, so more pounds are needed to settle a fixed dollar-priced invoice. The dollar price itself does not change, and a fall in sterling cost would only follow an appreciation of sterling.
- AThe sterling cost of its imported components risesCorrect
- BThe sterling cost of its imported components falls
- CThe dollar price of its components falls
Explanation
When sterling depreciates, each pound buys fewer dollars. More pounds are therefore needed to pay a fixed dollar invoice, so import costs in sterling rise. The second option describes an appreciation, and the supplier's dollar price is unchanged by the exchange rate move.
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