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The British pound fell by over 10% to a 30-year low against the US dollar after the UK voted to leave the European Union - Edexcel - A-Level Economics A - Question 8 - 2018 - Paper 2
Question 8
The British pound fell by over 10% to a 30-year low against the US dollar after the UK voted to leave the European Union. To what extent will this depreciation impac... show full transcript
Worked Solution & Example Answer:The British pound fell by over 10% to a 30-year low against the US dollar after the UK voted to leave the European Union - Edexcel - A-Level Economics A - Question 8 - 2018 - Paper 2
Step 1
UK exports are now cheaper when priced in dollars
Answer
The depreciation of the British pound makes UK exports cheaper for foreign buyers, particularly those using the US dollar. This could lead to an increase in demand for UK goods and services in international markets, thereby potentially boosting export-led growth.
Step 2
UK imports from the US are now more expensive
Answer
Conversely, the depreciation will increase the cost of imports from the US. This may lead to decreased demand for US goods, which could positively affect the balance of trade for the UK. If consumer preferences remain unchanged, UK consumers might shift towards domestic alternatives, promoting local industries.
Step 3
Imported inflation may become a concern
Answer
As the prices of imported goods rise, particularly necessities, inflation in the UK may increase, especially if wages do not keep pace. This imported inflation can negatively impact real incomes and consumer spending, potentially stunting economic growth.
Step 4
Potential for increased investment due to lower exchange rate
Answer
A weaker pound might attract foreign investment as assets become cheaper for investors outside the UK. This could lead to a multiplier effect on aggregate demand (AD), driving economic growth. However, it hinges on investor confidence and market conditions.
Step 5
The significance of the US as a trade partner
Answer
The US is an important trade partner for the UK, so changes in the GBP/USD exchange rate are likely to have significant impacts. Any shift in trade dynamics may also lead to changes in economic policies, as the UK government may seek to mitigate negative impacts through measures like tariffs or trade agreements.
Step 6
Assessment of the impact – temporary or permanent
Answer
The long-term effects of the depreciation depend on whether this change is a temporary market reaction or a permanent adjustment. If it is permanent, businesses might need to adapt their strategies, influencing future economic growth trajectories. Evaluating the sustainability of these impacts is crucial.