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 Exchange rates
 Exchange rate exchange - the price of one currency in terms of another.
 Find the current exchange rate of Kenyan shilling to;
 US dollar……………………………………………….
 Uganda shilling………………………………………...
 South African Rand ……………………………………
 Turkish lira ……………………………………………...
 Exchange rate depreciation- a fall in the external value of a currency as
measure by its exchange rate against other currencies
 Exchange rate appreciation- a rise in the external value of a currency as
measure by its exchange rate against other currencies
2  Domestic firms that gain from appreciation are;
 Importers of foreign raw materials and components for whom the domestic
currency cost of these imports will be falling. Increasing their
competitiveness
 Importers of foreign manufactured goods, who are able to import the product
more cheaply in terms of domestic currency
 Domestic firms that lose from appreciation are;
 Exporters of goods and services to foreign markets, because of the higher
products and services in terms of the foreign currency
 Businesses that sell goods and services to the domestic market and have
foreign competition- the domestic products will be more expensive compared
to imported goods, thus consumers are likely to switch to the cheaper option
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 Domestic business that gain from depreciation are;
 Home-based exporters- who can now reduce their prices in oversea
markets
 Business that sell domestic products will experience less price
completion from importers
 Domestic business likely to lose from depreciation are;
 Manufactures who depend heavily on imported supplies of materials,
components or energy sources
 Retailers that purchase foreign supplies.
 International competitiveness – non-price factors
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 It must not be thought that low prices alone will guarantee success of a business product if
they are only slightly less than those of competitors.
 Consumers consider many non-price factors in making purchasing decisions too.
 The following are the factors, other than product prices, that can determine the
international success – or competitiveness – of a business:
 Product design and innovation: An innovative product, such as the latest Apple iPad, will
attract custom, even though it may be sold at premium prices.
 Quality of construction and reliability: For several years, Japanese cars have been declared
the most reliable on the US market and, even though they are not the cheapest models
around, this encourages consumer interest.
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 Effective promotion and extensive distribution: These two factors go
some way to explain the universal success of McDonald’s restaurants.
 After-sales service: This includes extended guarantee periods.
 Investment in trained staff and modern technology: This should allow
flexibility of production to meet frequent changes in consumer tastes.
Higher labour productivity can overcome drawbacks caused by higher
costs of other resources.
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Market failure
 Market failure occurs when market forces fails to allocate
resources efficiently.
 Examples of market failure include:
 Existence of externalities
 Failure to produce public goods
 Under-provision of merit goods
 Over-production of demerit goods
 Existence of monopolies
 Government policies to solve market failure
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 Government can use the following policies to solve problem of market

failure. These policies include;
 Taxation…………………………………………………………………………….........
………………………………………………………………………………………….
 Subsidies…………………………………………………………………………….......
………………………………………………………………………………………….
 Regulation………………………………………………………………………….........
………………………………………………………………………………………….
 Direct provision………………………………………………………………………....
 Campaign………………………………………………………………………………
 Macro economic policies
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 These are policies designed to impact the whole economy
 1. Fiscal policy- The policy is concerned with decisions about government
expenditure, tax rates and government borrowing- This policy can help
achieve government macro economic objectives.
 To achieve economic
growth………………………………………………………………
 To reduce inflation……………………………………………………
 To reduce unemployment…………………………………………
 To ensure balanced trade (BOP)………………………………….
 To ensure clean environment……………………………………….
  2. Monetary policy- This policy is concerned with interest rates and the supply
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of money in the economy. The policy can be used to achieve government
macroeconomic objectives.
 To achieve economic
growth………………………………………………………………
 To reduce
inflation…………………………………………………………………………
 To reduce
unemployment…………………………………………………………………..
 To ensure balanced trade (BOP)
…………………………………………………………..
 To ensure clean
environment………………………………………………………………
10  3. Supply side policies- These are policies aimed at increasing
Aggregate supply of goods and services in the country. These
policies include:
 Research and development
 Education and training
 Subsidies
 Tax cut and tax holiday
 Privatisation
 These policies can be used to achieve government macroeconomic
objectives.