The falling pound

In October 2016 British tourists going abroad found they were getting less than 1 euro in return for £1. Concerns over the UK leaving the European Union have led to a fall in sterling. This depreciation of the currency is  likely to increase costs for UK firms, and squeeze profits, or lead to cost push inflation. However UK firms may benefit from the lower price of their products in foreign currencies.

You can find the value of the exchange rate against various currencies at the Bank of  England: http://www.bankofengland.co.uk/boeapps/iadb/Rates.asp

If you would like to see how inflations has affect the purchasing power of a pound within the economy you can an inflation calculator at the Bank of England: http://www.bankofengland.co.uk/education/Pages/resources/inflationtools/calculator/flash/default.aspx

You can find more information on the factors affecting the value of a currency in Chapter 27 of Foundations of Economics (4th Edition).

You can find more information on cost push inflation in Chapter 26 of Foundations of Economics (4th Edition).

You can read about the possible effects of a weak pound on the UK economy at:

https://www.theguardian.com/politics/2016/feb/22/why-is-the-pound-falling-britain-sterling-dollar-uk-credit-vote-eu

http://www.telegraph.co.uk/business/2016/07/06/what-does-a-falling-pound-mean-for-the-british-economy/

https://www.dur.ac.uk/research/news/thoughtleadership/?itemno=28492

Questions

 1. Analyse the possible reasons for the fall in the value of the pound against the euro.

 2. Analyse the possible effects of this  fall in the value of the pound on UK business.

US interest rates held low

At a recent meeting of the central bank of the US- the Federal Reserve, the majority of policy makers seemed to believe that US interest rates would increase by the end of the year. There is pressure to move these rates up from their present level  (0.25 to 0.5%) but before this is done there needs to be more evidence of a buoyant economy. Inflation remains below the 2% target set by the Federal Reserve but this may not be the case later in the medium term. Considerations taken into account by the Federal Reserve include the effect of slower growth in China and the possible effect of Brexit.

You can find out more about the Federal Reserve at: https://www.federalreserve.gov/

You can read about the aims of US monetary policy at: https://www.federalreserve.gov/monetarypolicy/files/FOMC_LongerRunGoals_20160126.pdf

You can read the minutes from the Open Market Committee which sets the interest rate here: https://www.federalreserve.gov/monetarypolicy/fomcminutes20160727.htm

 Questions

  1. What do you think the impact of higher interest rates might be on the US economy?
  2. What factors do you think would determine whether the Federal Reserve increases US interest rates ?

You can find out more about monetary policy in Chapter 26 of Foundations of Economics (fourth edition)

A change in Macro-economic policy

The Japanese government has faced the problems of stagnation and deflation for many years.

The policies adopted by the government, under the Prime Minister Shinzo Abe’s economic policy, have become known as “Abenomics”. This policy has three parts to it:

  • monetary expansion to try an stimulate spending and avoid deflation
  • fiscal expansion via increased government spending to boost aggregate demand
  • structural changes to make markets more competitive and increase the long run aggregate supply

The Bank of Japan has recently announced it wants inflation to be over the 2% target rate which was set over 3 years ago. It introduced negative interest rates at the start of the year to try and encourage the commercial banks to use their reserves to lend to businesses and households. However, the negative interest rates led to funds leaving Japan, making the yen more expensive against other currencies such as the US dollar. This threatened to damage Japanese exports and demand.

Japan is also suffering from a declining population. In the last five years the Japanese population has shrunk by nearly 1 million. It is now around 127 million people. This fall is due to a decreasing birth rate and lack of immigration.

You can find out more about the Japanese economy at:

Organisation for Economic Cooperation and Development: http://www.oecd.org/japan/

The CIA Factbook: https://www.cia.gov/library/publications/the-world-factbook/geos/ja.html

The World Bank: http://data.worldbank.org/country/japan

For news of Japan you can look at:

http://www.japantimes.co.jp/

https://www.japantoday.com/

Questions

  1. Why is the Japanese government worried about deflation?
  2. Why would the Bank of Japan set a target of inflation of over 2%?
  3. Illustrate the impact of an increase in government spending on aggregate demand.
  4. Explain what structural change might increase aggregate supply.
  5. Explain the possible effect of a negative interest rate on the commercial banks lending.
  6. Explain how an increase in the value of the yen might dampen demand in Japan.
  7. How might the falling population contribute to the stagnation of the economy?

You can find out more about inflation and deflation in Chapter 26 of Foundations of Economics (fourth edition)

You can read about the impact of exchange rates on the economy in Chapter 27

UK car output highest for 14 years

According to the Society of Motor Manufacturers and Traders UK car production in August reached its highest level for 14 years. Over 109,000 cars were produced in the UK more than 9% higher than the year before.

Demand for cars has been increasing both within the UK and abroad. Export volumes were up 10.2%. The UK car industry is regarded as very competitive internationally.

The impact of BREXIT (the UK’s decision to leave the European Union) is not yet known.

You can find more information from the Society of Motor Manufacturers and Traders at: http://www.smmt.co.uk/

Information from the Department for Exiting the European Union can be found at: https://www.gov.uk/government/organisations/department-for-exiting-the-european-union

You can find out more about factors affecting demand in Chapter 3 of Foundations of Economics (fourth edition)

 

Questions

  1. Why is an increase in output not necessarily an increase in demand?
  2. What factors do you think might affect demand for cars?
  3. What factors do you think might influence how internationally competitive the UK are industry is?
  4. What do you think the impact of BREXIT might be on the UK car industry?

Austerity on hold?

The government’s budget deficit measures the difference between its spending and the revenue it earns. The deficit means the government’s spending is greater than its revenue. A deficit adds to the national debt.

A key feature of Conservative economic policy under  George Osborne, the previous Chancellor of the Exchequer, has been to reduce the deficit, not least because of the interest that has to be paid on it. However the new Chancellor Philip Hammond has suggested there will be a “fiscal reset” with him in charge. This does not mean that balancing the books is off the agenda but that in a world of Brexit uncertainty it might be wise to keep some flexibility about exactly when the deficit is reduced. In a recent speech Hammond made it clear he was not going to back to the poor financial planning of some other governments but he did reserve the right to spend more to improve the infrastructure of the economy.

Hammond will set out his plans in more detail in the Autumn Statement in November.

You can find out more about the government’s financial plans at HM Treasury: https://www.gov.uk/government/organisations/hm-treasury

You can get an independent assessment of the government’s  financial position at the Office for Budget Responsibility: http://budgetresponsibility.org.uk/

Questions

1. Why do you think the Conservatives think it is important to cut the deficit?

2. Why do you think some economists believe that cutting the deficit has slowed growth in the economy?

3. How would you show the effects of improved infrastructure on the economy using aggregate supply and demand diagrams?

4. Why might Brexit had led to the government reconsidering its earlier plans over reducing the defict?

You can learn more about government fiscal policy if you read Chapter 22 of Foundations of Economics (4th Edition)

Going through the roof

The Confederation of British Industry (CBI), a business lobbying group, has warned that UK policy makers need to be ready to act and prevent house prices from increasing too fast. House price inflation has reached 10% in some areas.

The CBI stated it expected the first rise in interest rates would occur in the first quarter of 2015. It argued that the government needed to act quickly to deal with the major shortage of houses in the UK, so that supply could increase at the same rate as demand. The CBI wants councils to release more land and to explore the possibility of new cities being built.

The Organisation of Economic Cooperation and Development (OECD) also highlighted the need to control house price increases in the UK. A recent OECD report said that “Monetary policy tightening should be accompanied by timely prudential measures to address the risks of excessive house price inflation”.

Borrowing in the UK has already got more difficult.  At the end of April tighter rules on mortgage lending were introduced that required tougher checks on whether borrowers can afford to repay their loans. More measures may well be introduced.

The OECD stated that further action might include less access to the government’s Help to Buy programme, which provides guarantees for higher-risk mortgages in an attempt to encourage first time buyers enter the market.

Meanwhile, the UK Treasury said: “The chancellor has said we must remain vigilant in order to avoid repeating the mistakes of the past.

“This government has given the Bank of England new powers and new responsibilities to monitor risks in the economy and take action if necessary, something that did not happen before the crash.”

 Prices in the housing market are determined by supply and demand. To understand market forces you can read chapter 6 in Foundations of Economics (3e). The housing market is examined specifically on page 130

Questions

What are the possible causes of house price increases in the UK? Why does it matter if house prices are rising fast?

Illustrate the effect of a) an increase in demand b) an increase in supply on house prices

What actions might a government take to slow down house price increases?

Sources

http://www.theguardian.com/business/2014/may/12/cbi-high-alert-house-prices-interest-rates

http://www.theguardian.com/business/2014/may/06/uk-house-prices-oecd-warning

http://www.bbc.co.uk/news/business-27293044

http://www.telegraph.co.uk/finance/economics/10809896/OECD-warns-housing-boom-risks-overheating-UK-economy.html

SOS: save our seas

SOS: save our seas

The Global Ocean Actions Summit was held in April 2014 in the Netherlands to try and protect oceans around the world and prevent overfishing. Governments, business leaders, and NGOs from 80 countries committed themselves to firm agreements to restrict fishing and pollution.

The results from the summit were the agreements that:

  • The only way to end the war of attrition at sea is to stop overfishing and to eliminate overcapacity
  • Subsidies should be used for sustainable fisheries only;
  • Illegal fisheries need to be banned
  • There would be accelerated ratification of agreed mechanisms for improved fisheries practices to make the fisheries sector more sustainable, and to tackle pollution

Reading:

You can read about a similar issue known as the Tragedy of the Commons on page 128 on Foundations of Economics (3e).

You can also read about the problems of agreements between organisations if you read about cartels page 238-240.

Questions

Why are agreements between countries required to stop overfishing? What problems do you think there might be in keeping countries to these agreements?

Sources

http://www.government.nl/ministries/ez/news/2014/04/25/ocean-summit-action-for-healthier-oceans-starts-today.html

http://www.globaloceansactionsummit.com/

http://www.worldbank.org/en/news/press-release/2014/04/22/global-oceans-action-summit-food-security-blue-growth-hague