Part of the syllabus: International Economics
Source: The Independent
Date of the article: 2016-10-04
Link to article: The pound has hit a 31-year low
Brexit – a topic that hundreds of IB Economics students will discuss in their internal assessments and extended essays. This time let us take a look at the depreciating pound. It has fallen lower than anyone expected. What effects will this have on the UK economy?
Talking points for your Internal Assessment:
- As always and most importantly – define what is depreciation of a currency, plot a diagram $/£ or €/£ and show what could be the reason for this depreciation? Rising supply? Falling demand? Both? The article mentions what investors think and what could be the reason for the falling pound’s value.
- Right away there’s a good point for evaluation – could it be that “the pound was overvalued” and now it’s simply returning to the equilibrium (“natural correction”)? Maybe supply and demand are not as much in play as one would expect?
- Discuss the positive and the negative effects on the economy of this change in pound’s value:
- All goods that are imported will seem relatively more expensive now. What if those goods are used as inputs when producing other goods/services? That increases production costs which will translate into higher prices for consumers. According to the article: “The cost of the dollar-denominated raw materials that many UK factories and business need is rising fast. And these costs will be passed on to British consumers in the end.” Excerpts like this are worth quoting (remember, you get marks for that!). But not only that. Explain how those costs will be transferred on to consumers. You can choose to draw a macroeconomic diagram to show how all these higher production costs might increase inflation in the UK by shifting the AS curve up. Or take an individual market and show shifting supply and growing prices – the choice is yours.
- There are positive effects as well – depreciating pound means exports become more competitive internationally. Explain why and give examples! There is one in the article already – book manufacturing. It is even possible to show an AD shift in a macroeconomic diagram (e.g. Keynesian), but don’t simply jump to the diagram. Explain why you’re using the diagram and demonstrating increasing demand. You could mention the AD diagram equality GDP = C + I + G + X – M. X grows, M falls and GDP increases – more jobs and all the other benefits associated with economic growth. But do not forget that it can be countered by higher inflation (due to reasons mentioned in the previous point).
- This is a juicy article to use for your international economics IA – choose what you want to discuss for evaluation: macro or micro effects? Write about the effects on a particular market or argue the reasons for the depreciation? The choice is yours.
- To evaluate further – think about price elasticity of demand for exports and imports. It will help you discuss will the effect on the economy be positive (growing GDP) or negative (falling GDP and rising unemployment). If you happen to talk about importing food (or another necessity) – could living standards in the UK considered to be deteriorating?