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A depreciation of the pound sees the market value of the pound fall against other
currencies. The economic effects of a lower pound take time to happen economists say that there are time lags between a change in the exchange rate
and changes in, for example, inflation and the balance of payments.
The last major depreciation in the value of sterling came in the early-mid 1990s
following sterling's departure from the exchange rate mechanism. The pound was
devalued by nearly 15% against a range of currencies in September 1992 and
continued to drift lower in value for the next three years.
This revision note suggests some of the main economic effects of a lower value
for the pound
INFLATION
A fall in the exchange rate makes imported goods and services more expensive
in the UK. Producers may then pass on higher costs of imported components
and raw materials onto consumers. This causes extra "cost-push" inflation.
Wages may rise in response to this triggering off the possibility of a wage-price
spiral.
The extent to which a depreciation of the pound causes inflation depends in part
on how dependent producers are for their imported components and also their
willingness to "price to the market" and pass on costs to consumers.
In a recession demand for many goods is elastic and a lower pound may have
little effect on retail price inflation.
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therefore
the
current
account
improves.
See also: Terms of Trade Using example of UK, a depreciation in the Pound
did not effect the terms of trade as much as might be expected.
3. Global Demand.
During 2008-09, the depreciation in the Pound Sterling didnt effect the UK
current account deficit. One reason was the sluggish global growth. There was
little foreign demand for UK exports despite the fall in price.
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US Economy
1. What Went Wrong with US Economy?
2. Problem with Bailing out financial sector
UK Economy
1. Problems of Personal Debt
2. Problem of Inflation
3. UK Outlook
4. National Debt in UK
Recessions
1. How To Survive a Recession
2. Can A recession be a good thing?
Chinese Economy
1. Problems of Chinese Economic Growth
2. Should We worry About A Strong China
3. Chinese Growth and Costs of Growth
4. Chinese Interest Rates and Economic Growth
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