Tag: elasticity

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 financial crisis has, according to research from the Institute of Grocery Distribution (IGD), begun to lead to a fundamental change in shopping habits. People are now more ready to take packed lunches to work, walk rather than drive and even grow their own food to a greater extent than for many years.

Cash-strapped shoppers in search of Good Life Times Online (14/10/08)

Questions

1. With reference to the article, suggest products for which demand is likely to increase during an economic downturn.
2. Are all the products you identified in question 1 inferior products?
3. With reference to the article, suggest products for which demand is likely to decrease significantly during an economic downturn.
4. Comment on the likely value of the income elasticity of demand for each of the products you have identified in questions 1 and 2.