Between 1995 and 1997 the effective exchange rate of the pound sterling
appreciated by 20%. What factors might explain this increase in the value
of the pound?
5. Between 1995 and 1997 the effective exchange rate of the pound
sterling appreciated by 20%.
(a) What factors might explain this increase in the value of the
pound?
There are several reasons that contribute to the appreciation of the
pound.
INTEREST RATES
Interest rates have a large effect in a world where financial capital
can move freely between countries.
If for example the UK interest rates are high relative to elsewhere
this attracts inflows of money into the UK seeking to take advantage
of the high interest rates. This "interest differential" boosts the
demand for the currency and can cause its value to rise.
ECONOMIC GROWTH
Countries experiencing a rapid economic growth often find that their
exchange rate is strengthening. Traders in the currency markets may
take the rapid growth to be a sign of general economic growth and
"mark up" the value of the currency as a result.
Also economies with strong "export-led" growth may see their
currency's rise in value. Japan is a good example of this in recent
years. The Euro was weak during the first six months of its existence
in part because the financial markets were worried about the slow
growth of the European economy and the persistently high level of
unemployment.
INFLATION
As with the UK, as there are low levels of inflation, this has meant
that our goods have become cheaper and demand for our exports has
increased. Foreigners have bought pounds to finance our goods. This
has meant that the value of the pound has increased. However this is
like a cobweb with many downsides such as a rise in inflation as
exports are a component of aggregate demand.
In the long run, those countries with higher than average inflation
see their exchange rate fall. When inflation is high, a country
becomes less competitive in international markets causing a fall in
exports (a demand for a currency) and a rise in imports (a supply of
currency overseas). A fall in the exchange rate may be needed to
restore a country's competitiveness in overseas markets.
THE BALANCE OF PAYMENTS
When we operate at a current account surplus i.e. when our
exports>Imports, then foreigners will need pounds in order to finance
the exports we sell them. They will buy pounds. This will result in
the value of the pound to increase.
Selling exports represents a demand for the domestic currency from
foreign importers. When US consumers buy British Whisky they supply
dollars and this is eventually translated into a demand for pounds.
Increased inexpensive imports led to business failures, bank closures, and unemployment in cities. Britain ended The War of 1812 with America and trade increases. Britain’s industrial capacity exceeded Americas’.5 Britain then exported its surplus of manufactured goods to America. U.S. factories could not compete with Europe’s low labor costs and low price of goods. American imports rose from $12.9 million in 1814 to $151 million in 1816. Businesses were forced to close.
The main European competitor since the Second World War has been Germany; US market share has also dropped off from its peak in the 1950s. Whether this drop is as a direct result of the fall in comparative aggregate labour productivity is the topic of some discussion. Whilst it seems that must surely have an impact, Broadberry raises three important factors which may apply instead. Those are firstly, that UK exports were inevitably, going to decline as other ...
This is where a free trade policy comes in. In a free trade policy, tariffs are lowered, allowing more goods to be imported to the United States. Foreign nations will see the lowered tariffs in the United States and respond by lowering their tariffs on American goods. This will increase the overall trade between the United States and nations abroad. The Republican party would like to see a return to more protectionist policies.
In this section I will be discussing how inflation rates have increased over the past 40 years, and what effect this has had on monetary growth. Inflation rates are defined as the rate of change in price levels in our economy especially Canada. Surveys are conducted quarterly or monthly to determine and generate a Consumer Price Index. The CPI is conducted with a “basket of goods” to determine changes in consumer prices for Canadians. It is important to study and analyze the rate of inflation because it helps the government determine how the dollar value has changed over a period of time. Also to adjust pending contracts and initiate new pensions which have to take into account the effect of inflation. Less well-off people and elderly are more
Thus, imports of American goods are under less competitive pressure to keep prices low. Thus, weak dollar benefits U.S. exports by making American goods cheaper in foreign countries. Foreign tourists can afford to travel and visit the United States. When the dollar is falling, foreign purchasing power is increasing. Purchasing power is the amount of value of a good or service compared to the amount that you paid.
Economic indicators often affect and influence the value of a country's currency. The Trade Deficit, the Gross National Product (GNP), Industrial Production, the Unemployment Rate, and Business Inventories are examples of economic indicators. We will be dealing with four specific indicators: interest rate, inflation, unemployment, and employment growth, as well as Real Gross Domestic Product (GDP). Real GDP is so called because the effects of inflation and depreciation are accounted for in the figures. The state of the economy is important both on a micro and macroeconomic level.
In this sub-section, we present a brief overview of the Armington model that has been used by other researchers to find the relationship between exchange rate volatility and trade. In some trade models, such as neo-classical trade models, we assume that goods are homogeneous even though they are produced in different countries. Indeed, the prices of goods produced in different countries do not move in the same direction. However, it was first pointed out by Armington (1969) that goods that are produced in different countries need to be treated differently. An overview of Armington (1969) is that the change in demand for goods depends on the growth of the market in which firms compete and the growth of
This economic growth didn’t however continue for long, with the economy peaking just before the start of the year 2000 followed by a sharp downturn that resulted in a temporary recession occurring around the middle of the year. This erratic behavior, most pronounced in retail trade, can be explained by the effects of both the millennium bug and the introduction of a general consumption tax in the form of the GST. The millennium bug caused much panic and with it bought panic spending especially in the IT sector thereby over inflating an already close to booming economy and after the non-event that the millennium (or Y2K) bug caused spending slumped and then further slumped due to the holding back of consumer spending on big ticket items such as cars and houses until the introduction of the GST.
King (1990, page x) argues that the dissolution of empire has been critical to the growth of world cities. How far does this apply to London? Modern patterns of development and growth have been shaped and influenced by the historical context of colonialism. Within this context relationships between capitalist and pre-capitalist states or colonies helped forge a world economy, which would later lead to processes of globalisation and the current economic world order. Expansion in the world economy has been exacerbated by the freer flow of labour, goods, services and capital, which are features of the post-war, post-colonial world.
Greece has emerged as one of the fastest growing economies in the EU since the mid-1990s when it has recorded strong GDP growth, significantly outperforming EU averages. Greece was one of the fastest growing countries in the Eurozone with an annual growth rate of 4.3 % from about 2000 to 2007 compared to Eurozone average of 3.1...
Economic risk is another type of exchange risks companies have to consider when dealing globally. Changes in exchange rates are bound to affect the relative prices on imports and exports, and that will again affect the competitiveness of a company. An UK exporter dealing with companies in the US would not want the US$ to depreciate, because it would make the exports more expensive for the US market, thus the company will loose business.
The leading model, Monetary Model links exchange rate movements to the balance of payment, which is used for medium to long term analysis. The following assumptions cons...
There are many factors that affect the economy, inflation is one of them. Basically inflation is risingin priceof general goods and services above a period.As we see value of money is not valuable for the next years due to inflation. Today every country has facing inflationary condition in their economy.GDP deflator is a basictool that tells the price level of final goods and services domestically produced in an economy.GDP is stand for gross domestic product final value of goods and services, Furthermore GDP deflator shows that how much a change in the base year's GDP relies upon changes in the price level. . Inflation in contrast, how speedy the average prices intensity is increases or changes above the period so the inflation rate define the annual percentage rate changes in the level of price is as measure by GDP deflator more over GDP deflator has a advantage on consumer price index because it isn’t only based on a fixed basket of goods and services. It’s a most effective inflation tool to identify the changes in consumer consumption and newly produced goods and service are reflected by this deflator. Consumer price index (CPI) is also measure the adjusting the economic data it can also be eliminate the effects of inflation, through dividing a nominal quantity by price index to state the real quantity in term.
As an aftereffect of inflation, the purchasing power of a unit of money falls. For instance, a pack of gum that costs $1 and if inflation rate is 2% then in a given year will cost $1.02 the following year. As products and services require more cash to buy, the implicit value of that currency falls.
The U.K. uses pounds and the U.S. uses the U.S. dollar. The United Kingdom has a specific symbol to represent the pound as we do for our dollar, the pound symbol is £. Using a converter, one U.K. pound equals about 1.22 U.S. dollars (USD per 1 GBP - Past 24 Hrs.). Therefore, we will have to exchange our money before we leave.