High or low interest rate?

HideShow resource information
  • Created by: Matt Lowe
  • Created on: 09-04-13 13:00
Preview of High or low interest rate?

First 848 words of the document:

What are the economic consequences of a strong pound and a weak pound? Given the
current state of the UK economy, which do you think would benefit us the most?
Exchange rates are determined by supply and demand. If the demand for the pound rises, the pound itself
appreciates, whereas if supply for the pound rises, the pound depreciates. Currency is purely speculatively
and is dealt to make a profit. Currency flows due to a result of international trade in goods and services and
capital flows.
A strong pounds makes imports cheaper but at the same time makes goods made in the UK more expensive
overseas. UK tourism would suffer too, as the high exchange rate would put off holiday makers from
exchanging their currency and spending it. However, people who would benefit are UK residents: if they
travel overseas, to America for example, they would get more dollars for their pounds, and have more
purchasing power. UK motorists would benefit too because oil is traded in dollars, meaning more petrol can
be bought in pounds than in can in dollars. A weak pound appears to benefit everyone on a wider scale.
Exports become cheaper meaning firms selling goods abroad can increase their profit margins and foreign
firms need less currency to buy the same quantity of UK goods. Also, a depreciation in the pound should
start to balance out the trade balance. People who lose out on a weaker pound are UK residents buying
imported goods. This pushes up inflation too. Tourism becomes more expensive as British tourists don't get
as much currency for their pounds. Finally firms who import a lot of raw materials won't get as much as they
used to, forcing them to either spend more or reduce production, resulting in unemployment.
A weaker pound looks like it would benefit the UK economy more at the moment. It would make exports
cheaper and therefore imports more expensive. This encourages domestic consumers to buy more goods
made inside the UK. Exports and imports are also part of aggregate demand: reducing one and increasing
the other should boost the economy in the long run. The Royal Bank of Scotland reported that in the third
and second quarters of 2009 exports rose by £723million. And because the current economy is in a
recession, the problems that usually come with a weak pound such as inflation aren't a problem. Countries
such as Japan and China were alarmed at the rate at which their currencies appreciate and want them to
weaken sufficiently. However, in the long run a weaker pound would severely damage the UK economy,
especially in the tourism industry. The lack of currency a holidaymaker would get in return for their pounds
would put them off going on holiday all together. This depreciates the pound even further and eventually
the UK overseas tourism industry would have a negative effect on the whole economy. A weaker pound
encourages foreign companies to attempt to buy British companies. A key example was when Kraft
(American) tried to by Cadbury's (British). Because the pound had fallen against the dollar, Kraft executives
could offer Cadbury executives more money per share and not technically put up any more of their money.
This can result in companies becoming outsourced and a loss of jobs and industry in Britain altogether.
But, a strong pound could also benefit the UK economy in the longer run. Primarily a stronger pound is
beneficial to those wanting to exchange currency as they get a much better exchange rate. This is valuable
if a consumer in the UK is looking to enter to the foreign property market, as they will get more currency for
their pound. Another advantage of a strong pound is that it reduces the price of imports. In the current
economic climate where interest rates are low, people aren't saving money and so by making imports
cheaper, people are more likely to spend any disposable income they have. Most goods are imported,
including necessary goods. And because imports are part of aggregate demand, it will push living standards
up and begin to move the economy again. But the major disadvantage with the stronger pound in the
current economic climate is that the government want to boost exports as they are also part of aggregate
demand. The Chancellor of the Exchequer has done everything he can in order to increase exports and limit
the pound's strength.
In conclusion, and in the current UK economic climate, I think a weaker pound would benefit the economy
more than a strong pound would. A strong pound is only viable when the country in question isn't in a double
dip recession. A weaker pound should eventually get the UK economy out of the deficit by boosting
exports.

Comments

No comments have yet been made

Similar Economics resources:

See all Economics resources »See all resources »