New figures from the Centre for Economics and Business Research show that the UK has slipped from the fifth to the sixth largest economy in the world as measured by GDP. This places the UK behind the USA, Japan, China, Germany and now France. Two years ago, the UK was fourth largest (ahead of China). However, is GDP the most appropriate measure of the success of an economy?
Zut! France leapfrogs UK in economic table Times Online (7/12/08)
UK drops below first France and then Italy in world GDP league table CEBR News Release (8/12/08)
Questions
- Explain the difference between GDP, GDP per capita and GDP measured on a purchasing-power-parity basis.
- Explain why “….. overvalued sterling has inflated the UK’s claims to be among the top five world economies.”
- Discuss whether GDP per capita is the most appropriate measure of economic success.
In the 1990s UK living standards were estimated to be 4% below those of the USA, 33% less than in Germany and 26% lower than those in France. However, faster economic growth in the past two decades has, according to Oxford Economics, led to average incomes overtaking those in the USA and rising some 8% more than those of France and Germany.
UK living standards outstrip US Times Online (6/1/08)
…but at least we’ve got one up on the Yanks Guardian (6/1/08)
Questions
| 1. |
Explain the difference that the value of sterling makes to the measure of the standard of living. |
| 2. |
“With an adjustment made for this “purchasing power parity”, the average American has more spending power than his UK counterpart and pays lower taxes”. Define what is meant by purchasing power parity (PPP). Why does the standard of living need to be measured at PPS rates? |
| 3. |
Discuss the principal factors that have led to the increase in the standard of living in the UK. |
Hyperinflation in Zimbabwe is no longer news. Indeed the news below that inflation has risen to 2,200% may not even surprise us any more. However, inflation of this level should also mean similar changes in the exchange rate if purchasing power parity is to be maintained. The official exchange rate in Zimbabwe, however, hasn’t changed by anywhere near this amount and there are reports (See Scotsman article below) that the Governor of the Central Bank has even tried to portray a recent devaluation as not really a devaluation at all!
Our mutual friend The Economist (subscription) (12/4/07)
Zimbabwe inflation reaches 2,200% BBC News Online (26/4/07)
Zimbabwe’s inflation rate surges to 231,000,000% Guardian (9/10/08)
A month ago, the hospitals were overflowing. Now they lie empty Guardian (6/12/08)
Hyperinflation in Zimbabwe Wikipedia
(27/4/07)
How Zimbabwe lost control of inflation Newzimbabwe.com (11/12/09)
Questions
| 1. |
Explain, using diagrams as appropriate, how hyperinflation will affect the exchange rate in Zimbabwe. |
| 2. |
Discuss the likely economic impact of not devaluing the official exchange rate in line with the level of inflation in Zimbabwe. |
| 3. |
Assess possible exchange rate policies that would help reduce the level of hyperinflation in Zimbabwe. |
In March 2007, the pound reached a record high against the dollar. This made it an excellent time for UK tourists to visit the USA with prices appearing relatively low thanks to the exchange rate. These exchange rate values also affected the balance of payments of both the USA and the UK and the article below looks at the economic impact of the high exchange rate against the dollar.
Why everything’s almost free in America (and why it won’t last) Guardian
(23/4/07)
Questions
| 1. |
Explain the principal reasons for the change that has taken place in the exchange rate in recent years. |
| 2. |
“On a PPP basis, a pound should buy $1.60”. Explain what is meant by this statement. |
| 3. |
“My bet is that within a year the rate will be closer to $1.60 than $2. Maybe a lot closer.” Assess the impact of this possible outcome on economic growth and inflation in the UK. |
| 4. |
Examine the likely impact of the high exchange rate on the balance of payments situation of (a) the USA and (b) the UK. |
It was over 25 years ago that £1 was worth more than $2 on the foreign exchange markets, but that important psychological barrier was broken again this month as the value of sterling crept above $2 on foreign exchange markets. The continuing weakness of the dollar is making life difficult for UK exporters and also for firms in the Eurozone as the weakness in the dollar also affects the Euro and other major currencies.
Pound reaches 26-year dollar high BBC News Online (18/4/07)
UK pound goes through $2 barrier BBC News Online (17/4/07)
Yen hits record low against euro BBC News Online (16/4/07)
Pound hits 25-year dollar high Guardian (18/4/07)
British pound breaks through $2 International Herald Tribune (17/4/07)
Questions
| 1. |
Explain the impact of the weak value of the dollar on international markets on the price of UK imports and exports. |
| 2. |
Assess the likely impact of the high value of sterling on the major UK economic targets. |
| 3. |
Assess policies that the government could use to try to reduce the value of sterling against the dollar if they chose to. |