Category: Economics 10e: Ch 25

The article below is an economic briefing from The Times, published to support the Bank of England’s Target 2.0 competition. It considers the importance of the exchange rate in determining the demand for imports and exports and therefore the impact that exchange rate changes are likely to have on aggregate demand.

Economic briefing: exchange rate is crucial to export demand and influences inflation Times Online (20/10/08)

Questions

1. Explain how import prices and export prices change in response to a fall in the value of sterling.
2. Define the terms (a) price elasticity of demand for imports and (b) price elasticity of demand for exports.
3. With reference to your answers to questions 1 and 2, assess how the balance of payments will change in response to a fall in the value of sterling. What is the relevance of the Marshall-Lerner condition to these changes?

The euro has climbed during March to a record high against both the dollar and the pound. The reluctance of the ECB to cut interest rates has simply served to strengthen this trend and it looks set to continue for a while.

Euro hits record highs Times Online (6/3/08)
Euro hits new highs as ECB rejects early cut in rates Times Online (7/3/08)
Sterling hits new low against euro Guardian (5/3/08)
Dollar slides to fresh euro low BBC News Online (14/3/08)

Questions

1. Explain the principal factors that have led to the appreciation of the euro against the dollar.
2. Discuss the likely impact of this appreciation on firms in (a) the eurozone and (b) America.
3. Examine whether the appreciation of the euro strengthens or weakens the case for those in the UK wanting to join the euro.

China’s rate of inflation has hit an 11-year high, partly due to the cold winter weather destroying crops and pushing up food prices. However, inflationary pressure has been growing for some time with rapid economic growth and the resultant pressure on resources. This is despite six increases in interest rates in the past thirteen months.

Families feel pinch as inflation threatens economic miracle Guardian (25/2/08)
Chinese inflation soars to an 11-year high Times Online (20/2/08)
Chinese inflation hits 11 year high Times Online (19/2/08)

Questions

1. Explain the principal factors that have led to the increase in inflation in China.
2. “Policymakers in China will likely try to tighten monetary policy further, with more reserve requirement ratio hikes, faster Chinese yuan appreciation, and more heavy handed controls over bank lending.” Discuss the likely effectiveness of these policy measures.
3. Assess the extent to which changes in food prices will affect the overall level of aggregate demand in the Chinese economy.

The fall in the dollar has continued with the value of sterling rising above $2.10 for the first time in 26 years. The articles below look at a range of issues related to the strong pound and there are also case studies of the impact on a guitar strings company and the manufacturer JCB.

Questions

1. Identify the main factors that have caused the fall in the value of the dollar. Use supply and demand to illustrate your answer as appropriate.
2. Assess the impact of the strong pound on UK exporters and importers.
3. Discuss whether intervention in the foreign exchange market may be appropriate to help UK exporters to remain more competitive in world markets.

In complete contrast to the holidaying habits of the Blair family, Gordon Brown chose to take his holiday this year in Weymouth on the Dorset Coast. Is he setting us a good example? Should we all be holidaying at home to support the UK economy? In the article below, David Smith looks at the impact of holidaying abroad on the UK balance of payments.

Holiday at home and do your bit for Blighty Times Online (26/8/07)

Questions

1. Examine the impact of growing overseas travel on the UK balance of payments.
2. Assess the impact of a reduced tourism deficit on the rest of the UK economy.
3. Discuss policies that the government could adopt to help encourage a reduction in the balance of payments deficit on tourism.