Cambridge O Level Business Studies · Syllabus 7115 · External Influences on Business Activity
Depreciation
What is Depreciation?
A fall in the value of a currency relative to another currency, so that one unit of it buys less foreign currency than before. For a business whose home currency depreciates, imported inputs become more expensive measured in home currency, while its exports become cheaper for foreign customers paying in their own currency, potentially improving export competitiveness and demand. Depreciation is therefore favourable to exporters and unfavourable to importers, and an exporter that relies on imported components can experience both effects at once.
This definition is part of the External Influences on Business Activity chapter in Cambridge O Level Business Studies.
Depreciation in context
Government policy, environmental and ethical expectations, and globalisation are external forces a business cannot control but must trace through to a specific effect on itself. A change in taxation, government spending or interest rates reaches a business's costs, prices, demand and cash flow by a different route each time. A private cost is paid by the business itself; an external cost falls on a third party outside the decision — residents living with pollution, for example. Appreciation of the home currency helps importers and hurts exporters, and depreciation does the reverse, so the direction of any exchange-rate effect depends on naming the currency and the firm's position.
Common mistakes with Depreciation
- “A weaker currency is good for the country's businesses.” Fix Depreciation helps exporters compete and hurts importers, in the same economy, at the same time. Many exporters are also importers of components, so the two effects can meet inside one firm. Always name the currency and the firm's position before you claim a direction.
Examiner tips on Depreciation
- The sentence that completes the evaluation. “The firm is both an exporter and an importer, so the depreciation helps its sales and hurts its costs at the same time; which dominates depends on whether imported content is a larger share of its cost base than exports are of its revenue.” It is the hardest step in the topic, and it requires no calculation whatsoever.
Questions students ask about Depreciation
Is a weaker currency always good for a country's businesses?
No. Depreciation of the home currency helps exporters, because their goods become cheaper for foreign customers to buy, but it hurts importers, because imported inputs become more expensive in home currency — and both effects happen in the same economy at the same time. Many exporters also import components, so a single firm can experience the benefit and the cost of depreciation at once.