Pearson Edexcel International GCSE Economics: Exchange rates: rises and falls (4EC1) – Revision Notes

These notes condense section 2.2.3 (Exchange rates) of the Pearson Edexcel International GCSE Economics (4EC1) specification, Issue 3, February 2026, a single-tier course. Read the full study guide for explanations and then use the practice questions. Related notes: the current account. Find the course on the Edexcel IGCSE Economics hub, tick things off on the printable checklist, and check your level with a free diagnostic. All figures below are invented and illustrative.

Key definitions (2.2.3 a, c, d)

Term	Meaning
Exchange rate	The number of units of one currency needed for one unit of another
Appreciation	Market forces push a currency’s value up against another
Revaluation	A rise in a currency’s value chosen by the government or central bank, which sets the rate
Depreciation	Market forces push a currency’s value down against another
Devaluation	A fall in a currency’s value chosen by the government or central bank, which sets the rate
Floating rate	Set by demand and supply in the currency market
Fixed rate	Held at a level chosen by the authorities

Converting currencies

Take 1 AC = 2.50 BC.

• AC to BC: multiply by 2.50. A 30 AC good costs 75 BC.
• BC to AC: divide by 2.50. A 12 BC good costs 4.80 AC.
• Percentage change in the rate = (new − old) ÷ old × 100.

Sense check: the currency with the higher value gives you a bigger number of the other currency.

Determination of the rate (2.2.3 b)

Axes: exchange rate (BC per AC) up the side, quantity of AC along the bottom. The demand line falls, the supply line rises, and the equilibrium rate is where they meet.

Source	Demand for AC	Supply of AC
Trade	Foreigners buy exports	Residents buy imports
Tourism	Visitors to Country A	Residents travelling abroad
Investment and saving	Foreigners buy Country A assets	Residents send money abroad

What shifts the curves

Event	Curve	Direction	Rate
Higher interest rate in Country A	Demand	Right	Rises
Higher interest rate abroad	Supply	Right	Falls
Rise in foreign demand for exports	Demand	Right	Rises
Rise in spending on imports	Supply	Right	Falls
Speculators expect AC to rise	Demand	Right	Rises
Speculators expect AC to fall	Supply	Right	Falls

Method in steps for a diagram answer:

1. Label the axes and the original demand and supply curves.
2. State which curve shifts and why.
3. Draw the new curve and label the new equilibrium rate.
4. Say whether the currency has appreciated or depreciated.

Speculators: their buying or selling is based on what they expect to happen. This can make the expected change happen.

Effects of a rate change (2.2.3 c, d)

Starting position: 1 AC = 2.50 BC, a toy costs 30 AC and a jacket costs 12 BC.

	Appreciation to 3.00 (+20%)	Depreciation to 2.00 (−20%)
Toy price in BC	90 (up 20%)	60 (down 20%)
Jacket price in AC	4.00 (down 16.7%)	6.00 (up 25%)
Export price (foreign currency)	Rises	Falls
Import price (home currency)	Falls	Rises
Quantity of exports demanded	Falls	Rises
Quantity of imports demanded	Rises	Falls
Current account	Tends to worsen	Tends to improve

The current account result depends on price elasticity of demand.

Worked reminder: depreciation and the current account

Exports 5,000 units at 30 AC; imports 40,000 units at 4.80 AC. Balance = 150,000 − 192,000 = −42,000 AC.

Rate falls to 2.00. Export elasticity 1.5, import elasticity 0.6.

• Exports: price in BC down 20%, quantity up 30% to 6,500 units, earnings 195,000 AC.
• Imports: price in AC up 25%, quantity down 15% to 34,000 units, spend 204,000 AC.
• New balance = −9,000 AC. The deficit narrows by 33,000 AC.

With export elasticity 0.5 and import elasticity 0.3 the balance becomes −57,000 AC. The deficit widens.

Worked reminder: finding a new equilibrium

Market for AC (millions per day). Demand is D = 145 − 30r and supply is S = 30r − 5, where r is BC per AC.

Rate (BC per AC)	Demand	Supply
3.00	55	85
2.50	70	70
2.00	85	55

• Equilibrium: 145 − 30r = 30r − 5, so r = 2.50 and quantity = 70.
• Higher interest rate shifts demand right by 30: 175 − 30r = 30r − 5, so r = 3.00 and quantity = 85. The AC has appreciated by 20%.
• Instead, more spending on imports shifts supply right by 30: 145 − 30r = 30r + 25, so r = 2.00 and quantity = 85. The AC has depreciated by 20%.

Worked reminder: a government changes a fixed rate

Under a fixed rate the authorities hold 1 AC at 2.50 BC. If they revalue to 3.00, the effects on prices and trade are the same as an appreciation: exports cost more abroad and imports cost less at home. If they devalue to 2.00, the effects match a depreciation. The difference is the cause: a deliberate decision, not market forces.

Chains of reasoning

Learn these as short chains. Each link should be a separate sentence in an extended answer.

Higher interest rates and the exchange rate

1. Interest rate in Country A rises.
2. Saving in Country A offers a better return.
3. Foreign savers buy AC to deposit their money.
4. Demand for AC shifts right.
5. The exchange rate rises (appreciation).

Depreciation and the current account

1. The exchange rate falls.
2. Exports cost less in foreign currency.
3. Foreign demand for exports rises.
4. Imports cost more in home currency.
5. Demand for imports falls.
6. Export earnings rise and import quantity falls, so the current account moves towards surplus if demand is elastic.

Appreciation and the current account

1. The exchange rate rises.
2. Exports cost more abroad, so export demand falls.
3. Imports cost less at home, so import demand rises.
4. The current account moves towards deficit.

Must-know distinctions

• Appreciation versus revaluation: market versus government decision.
• Depreciation versus devaluation: market versus government decision.
• Quantity versus value: a fall in import quantity does not mean a fall in import spending if each unit costs more.
• Price in home currency versus foreign currency: exports are priced in the home currency but the foreign buyer sees the converted price.
• Winners and losers: exporters gain from a weak currency, importers and consumers of imported goods gain from a strong one.

Evaluation points to remember

• Elasticity decides the net effect on the current account.
• Imported inputs cost more after depreciation, so firms may lose some of their gain.
• Effects can take time to appear.
• A strong currency gives cheaper imports but hurts export industries.
• The result depends on how large the change in the rate is.

Quick self-test

1. What is an exchange rate?
2. If 1 AC = 2.50 BC, how much is a 36 AC item in BC?
3. At the same rate, what is 45 BC in AC?
4. Name two factors that would raise demand for AC.
5. Explain what happens to the AC if speculators expect it to fall.
6. The AC moves from 2.50 to 3.00 BC. Calculate the percentage change.
7. State what happens to the BC price of Country A’s exports after that change.
8. What is the difference between depreciation and devaluation?
9. A rate falls from 2.50 to 2.00 BC per AC. Calculate the new AC price of a 12 BC import.
10. Give one reason why a falling rate may leave the current account balance no better.

Answers

1. The amount of one currency needed to buy a unit of another.
2. 36 × 2.50 = 90 BC.
3. 45 ÷ 2.50 = 18 AC.
4. Higher interest rates in Country A; higher foreign demand for Country A’s exports; speculators expecting a rise.
5. They sell AC, so supply of AC rises, and the rate falls (this is a depreciation).
6. (3.00 − 2.50) ÷ 2.50 × 100 = 20% appreciation.
7. It rises, for example from 75 BC to 90 BC for a 30 AC good.
8. Depreciation is a fall caused by the market. Devaluation is a fall chosen by the authorities.
9. 12 ÷ 2.00 = 6.00 AC, up from 4.80 AC.
10. Demand for imports or exports may be inelastic, so the import bill could rise by more than export earnings.

Where marks are usually lost

• Giving a vague definition, such as “the value of money”, with no mention of another currency.
• Drawing a diagram with unlabelled axes or without naming the new equilibrium.
• Shifting the wrong curve when interest rates change.
• Stating that exports become “cheaper” after an appreciation.
• Multiplying instead of dividing, or the other way round, in conversions.
• Describing the effect on the current account without explaining why.
• Not separating the effect on price from the effect on quantity demanded.
• Giving a one-sided answer with no mention of who loses.

Official syllabus

Pearson Edexcel International GCSE in Economics (4EC1) specification, Issue 3, February 2026, published by Pearson Education Limited, section 2.2.3.