Detailed Economics update from John Birchall
The unexpected fall in last quarter GDP figures, which may have been the result of bad weather, has set the foreign exchange market an interesting problem – will the £ sterling move upwards or drift downwards in the coming weeks?
Some are suggesting that with rising CPI numbers the Monetary Policy Committee of The Bank of England may be tempted to raise short-term interest rates. If they did this then the £ would probably move upwards. If the MPC decides against a change in base rates then the pound will continue to slip.
This might be a rather interesting question to ask your students – if it’s up then what are the economic (and political?) implications or if it drifts down then what will be the influence on the economy of the United Kingdom
When analysing their answers you might like to look at and may be include some of the following:
Quantitative Easing Explained – carton, quite good and makes what to some is rather confusing just that bit easier to understand.
http://www.youtube.com/watch?v=PTUY16CkS-k&playnext=1&list=PL8413679D42920CEB&index=92
Monetary Policy Explained – quite an easy analysis to follow – though students will need to know basic use of AD/AS analysis and National Income constituents. Should help with the dreaded ‘differentiation’.
http://www.youtube.com/watch?v=kQnAmjo1RYw
Economics Online – excellent resources – simple way through the basics of monetary policy
http://www.economicsonline.co.uk/Managing_the_economy/Policy_instruments.html
http://www.economicsonline.co.uk/Managing_the_economy/Monetary-policy.html
Some more numbers to help them analyse the movements within UK economy
More data available from
http://www.thisismoney.co.uk/interest-rates
So, what might happen if the £ drifts downwards?
• Exports become cheaper (eventually) and this may make UK more competitive
• This would boost growth potential in both the manufacturing sector and exports – Vince Cable (Business Secretary) sees this as our best way out of our current economic problems – note he is not promoting that everything should be based on consumer led growth
• Holidays and foreign travel would cost more
• Anything else – what of the price of imports – raw materials and food?
But what if it drifts upwards – if we raise short - term interest rates
• Imports would they rise or fall in price?
• How would this affect our growth strategy?
• What did the outgoing Director of CBI say about current economic planning on 24th January?
Some useful economic terms
Hedging - is the process of protecting a transaction or investment against risk. If a company who owes money to an overseas business it may want to hedge against the risk that the exchange rate moves against them. They can do this by taking out a ‘future contract’ for foreign exchange. So they agree to buy now at a fixed price in the future.
An interest rate - is the reward for giving up use of money and is an amount paid to a lender over and above the original sum borrowed – it is normally expressed as a % per annum. The rate of interest is the price of money. It is the extra proportion that has to be paid when borrowing money or the extra that a saver receives when putting their money aside for the future.
The Monetary Policy Committee of the Bank of England that meets each month determines the rate of interest
Quantitative Easing - part of government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity
See you next week...