What is a 'strong pound'?

As an economics student, I am having to come to grips with various definitions, and explanations for a variety of complex terminology.

Everything I thought I understood (from a general 'life-knowledge' perspective) has now got an additional layer of complexity associated with it.

University, and independent learning means that I am left searching Google at ridiculous hours for in depths explanations. This is less than ideal.

It seems that economics is considered some sort of ridiculously evil subject that one should leave others to do, yet in reality it is not that hard. An appreciation of the basics of economic theory for example can go a long way in widening horizons when doing something as simple as watching the news. It's not tough to pick up the basics, if you're good with maths and pay attention to the way in which a company behaves in a certain economic climate. Whether you run a poker company or you're just an everyday office worker, the recent economic issues of the West have drawn everyone into more economically-fuelled discussions.

No-one on the web seems to go back to basics. I will, and I will start with the pound.

The pound is the currency of the United Kingdom (for now). It is referred to as GBP, Sterling, Pound and so on. Relative to other currencies it is one of the most highly valued (read on).

Essentially, the strength of a currency refers to its value relative to another currency (typically the USD). If £1GBP is worth $1.50, it is weaker than if £1GBP were worth $1.75. Simple right?

Assuming the price of an apple in America were $0.25, a stronger pound would allow the consumer to purchase more. On a larger scale, a strong pound is great for importing (buying commodities from elsewhere).

On the flip side, if you are selling apples at $0.25, a weaker pound is better as you need to sell less to get the same equivalent GBP value. On a large scale this means exporting is better if the pound is weaker.

Example
With the crash of the British economy over the last year and a half, the pound has lost a lot of its value. At one point it was worth less than the Euro... it was extremely weak.
For a consumer to get EUR to spend abroad, they had to pay significantly more GBP than they would have one year ago for example.

Why
Currency works like any other market. It is bought and sold (exchanged with other currencies). The GBP will get stronger if people demand more of it, and weaker if people demand less of it. It is basic 'Supply and Demand' !

My interest in currency strength arose from my interest in domain investing: an online business for which most transactions are conducted in USD. At numerous points in time I have had to weigh up whether a purchase was a good or bad deal. In the past i sold a domain for a 5% loss, but in 'real' terms sold the domain for more GBP. When I withdrew, and converted my USD balance, I had more pounds to spend.


Thomas Clowes

Thomas Clowes

I am a 28 year old software engineer from the United Kingdom. During the day I build multi platform applications. In my spare time I eat food and run marathons. Sometimes I write angry tweets.