The headline on the BBC website this afternoon is "Pound falls after surprise dip in inflation". It is important that students taking the A2 economics papers next month are able to give current figures for the macroeconomic indicators, so they should take note of today's CPI inflation figure for April, which is down to 2.4% from 2.8%.
They should also note the reasons - weaker commodity prices and oil in particular, with petrol and diesel prices contributing half of the drop in inflation. Slow earnings growth is also expected to contribute to the outlook for inflation remaining closer to the 2% target than it has been since the end of 2009 - which also suggests that the remaining inflation is not due to demand-pull pressures, but to cost-push.
But can they explain why and how the announcement of a lower rate of inflation has led to a weaker pound? It is not enough, in an essay, simply to state that this cause-and-effect has taken place; in order to gain good marks for analysis, it is essential to trace the process by which one leads to the other. This article from Reuters should give the clues that they need to fill the gaps on the table below ...
This week, I’ve been revising exchange rate policies with my Year 13 Economics class. This is a hot topic in Thailand as the Baht recently hit a 17 year high against the dollar.
The recent debacle in Cyprus has essentially been shrugged off by the markets. The European Central Bank vigorously asserts the crisis in the Euro zone is over. So why is there continued unease about the financial viability of countries such as Spain and Portugal, a morass into which even the French are now being dragged?
Economic theory helps us understand a bit more about why this is the case. One thing which the last few years in Europe have shown very starkly is the massive difference between debt which is denominated in nominal terms and that which is in real terms. Nobel Laureate Chris Sims makes the point clearly in his recently published Presidential Address to the American Economic Association.read more...»
This 10-question revision quiz focuses on exchange rates.
Here is a selection of resources on the Cyprus banking crisis and the controversial bail-in of uninsured large depositors. Particular credit to the team at Saxo Bank for an excellent info-graphicread more...»
This article gives the opportunity for some neat cause-and-effect analysis. The cause is data from the ONS which shows that manufacturing output fell by 1.5% in January, following a 0.9% rise in December. The effect? Sterling has fallen to another low against the dollar. However the chain of argument which links this to the fall in manufacturing data is missing, as if often the case in students' essays, and which tends to cost them valuable analysis marks in exams.
Aggregate Demand may be stimulated by an increase in exports. Ha-Joon Chang, Author of the best seller, 23 Things They Don’t Tell You About Capitalism considers reasons in a short article for The Guardian why this hasn't happened after Sterling had fallen against other major trading economies. " Compared with ...2007, the pound has been devalued about 30% against the dollar, 50% against the yen, and 20% against the struggling euro. Yet despite the huge incentive to export created by such devaluation, Britain is still running trade deficits because it has lost the productive capacity to respond."
It may help students consider plausible policies to reduce its trade deficit, a macroeconomic goal overlooked in arguments over fiscal and monetary policies to control inflation or output. Finally it may aid evaluation, how different are the most pressing short and long term macroeconomic challengers facing UK governments.
Link to most trade figures.
This is great for understanding key shifts in global trade and investment. The Economist offers this short video on the rising prominence of Chinese money in property and currency markets and FDI from Chinese businesses within the EU.read more...»
Are you following important macroeconomic developments in Japan? The new government of Shinzo Abe is reforming monetary policy - including a change to the inflation target - and undertaking more aggressive fiscal measures. Will it work in lifting the Japanese economy to a higher growth plane after two decades and more of sluggish growth and the debilitating effects of price deflation?read more...»
Mark Austen considers whether the UK economy has on balance benefited from being outside of the Euro Area in recent yearsread more...»
Evaluating the UK’s macro performance outside of the Euro Zone
- Decision made in 2003 that the UK would remain outside
of the single currency
- UK remains a full member of the single market
- Supportive of further EU enlargement but distanced from deeper fiscal / banking intregration
Crucial question both in the short and medium term is whether non-participation in the Euro makes a significant difference to key macro outcomes
- Real GDP growth, estimated Trend growth (LRAS)
- Core CPI inflation and inflation expectations
- Employment and unemployment rates
- Trade balances (with EU and beyond)
- Trends in relative productivity and per capita incomes
An updated glossary of key terms for AS macroread more...»
I was told off this week by my students for using McDonald's as an example to illustrate my point yet again. In fact it was the second week on the trot that I was reprimanded as they told me previously that I was always peppering my conversation with Latin phrases "'cos it makes you sound more clever."
"No I don't," I replied - I've told my students a million times not to exaggerate. The offending example came as I was attempting to explain how fatty foods (especially those from the exalted temple of the Golden Arches) were a demerit good. I thought about it for a little while and realised that two weeks ago I'd told them about the use of 'stars' to motivate McDonald's staff and their extensive training programmes when we discussed labour productivity. I'd also mentioned them when we discussed possible issues relating to economies of scale and the fact that a homogenised world can lead to less choice (a weak argument in their view - a McDonald's in every town sounded like a wonderful idea) and discussed the use of persuasive advertising as an example of non-price competition. They were right, I seemed to be talking about McDonald's all the time - and I'm a vegetarian!
"Mea culpa," I confessed.read more...»
Dutch Disease was first coined in 1977 by The Economist in reference to the decline in the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959. It is a phenomenon that arises when exploitation in the exporting of natural resources leads to an appreciation in the value of the currency of a country thus making its exports less competitive internationally. An increase in the revenues from natural resources pushes the value of a nation’s currency higher compared to other countries. This directly impacts the trade balance of that country as exports seem comparatively more expensive and thus less competitive. Out of all the sectors this has the greatest impact on the manufacturing sector.
The Chinese renminbi is not yet as recognisable as the US dollar or the Euro but with China's continued growth and rising influence as a major global economic power, their domestic currency is becoming more widely used when settling accounts in trade in goodsand services. In this new Financial Times video Denise Law explores the benefits of using renminbi in trade even though the renminbi is not yet fully-convertible in world foreign exchange markets.read more...»
Have a guess at the price tag (measured in US dollars) of a large margarita pizza in the comfortable middle-class environment of San Paulo in Brazil? Would you expect it to be less or more expensive than say a home delivered pizza to your house from leading UK business Dominos?
The rise in foreign currency reserves is largely the result of China’s enormous trade surpluses but also the consequence of intervention in currency markets by the Chinese central bank. To manage the value of the exchange rate it buys dollars and sells Yuan. China uses a large slice of their currency reserves to finance overseas investment including the role of Sovereign Wealth Funds to invest in developed and emerging countries including many in Africa. A rise in foreign currency reserves increases the money supply and has led to a surge in domestic lending including much money pumped into property developments.
A recent estimate valued Chinese foreign currency reserves at $3.2 trillion. In 2010, nearly two-thirds of China’s reserves were held in US dollar assets such as bonds, equities, money on deposit in US banks and property. But recently there are signs that Chinese investors have been diversifying away from the dollar.read more...»
A summer hat tip to Alan Fearnley for spotting this excellent teaching resource from the BBC. A recent Radio 4 Analysis programme was devoted to the issue of a return to the Gold Standard (a fixed exchange rate system). It was by Simon Jack who covers economic and financial matters for the Today programme. It is very accessible for Years 12 and 13. Here are the details for people wanting to access content from the programme.
Radio 4 Analysis on Twitter (Click Here)
See also: Duncan Weldon (Guardian): Back to the gold standard? It makes no economic sense
Last week I attended a very interesting lecture at the LSE on the Eurozone crisis, given by Leszek Balcerowicz, a Polish economist who is former chairman of the National Bank of Poland and Deputy Prime Minister.
The following blog outlines his thoughts, but also includes useful links to articles to read.
Using the crisis as a case study will hugely benefit A2 students as it encompasses many of the topics covered in the syllabus.
A short glossary covering concepts relevant to exchange rate economicsread more...»
The exchange rate measures the external value of sterling in terms of how much of another currency it can buy. E.g. in July 2011 £1 would buy you $1.65 and Euro 1.17. The daily value of the currency is determined in the foreign exchange markets (FOREX) where billions of $s of currencies are traded every hour. The value of the pound in the currency markets depends in how strong is demand for the currency relative to supply
Many factors affect the external value of one currency against another and one of these factors is the level of interest rates in a country compared to other economies. Money moves around the world economy seeking the best risk-adjusted rate of return. The rate of interest available on deposit in the banking system of a particular country is a factor that might drive what are known as “hot money” flows into and out of a particular currency.read more...»
Distinguish between a fixed and a managed floating exchange rate systemread more...»
Is the US dollar going to be knocked off its perch as the only true global currency? Professor Barry Eichengreen, the author of Exhorbitant Privelege argues that there are strong reasons to believe that the US dollars’ position in the world financial system will decline in the years ahead.
The US dollar has been for many years the world’s most powerful currencies but this power seems to be waning as other currencies rise in significance and the US economy struggles to recover from their financial and economic crisis and the fiscal challenge. Eichengreen argues that there will be three truly global currencies going forward - the dollar, the Euro and the remnimbi.read more...»
The US senate has pushed through the bill which aims to punish China for allegedly undervaluing its currency. Is passed into law it would allow Washington to impose tariffs on imports in order to protect its domestic industries. The role and impacts of tariffs and other forms of protectionism form a big part of the ‘international trade’ section of most Economics courses and this article could be a good starting point for those discussions.
The U.S came closer to finally calling the Chinese a currency manipulator and retaliating in the new round of protectionism fears. A good summary of the key issues here.
Here is a ten question quiz using Zondle focusing on currencies around the world.read more...»
In mainland China, authorities have put restrictions on property speculators to dampen the market, while in Hong Kong prices have risen by 70% in less than two years. But the 25% depreciation of sterling over the last two years makes the London property market a real draw for property investors from China. Sky News reports that one in three of buyers of new properties in London come from China and Hong Kong, mainly in the £400,000 - £1mn bracket, either seeking accommodation for their children studying in London or simply an investment. If - or when - the sterling/dollar exchange rate recovers, their return will be enhanced by the increased return they could get when they take their money out of the UK market again.read more...»
“The only way”, says William Hague, “to increase our national prosperity and secure our growth for our economy, is through trade, and our Embassies play a vital role in supporting British business.” Therefore the Foreign Office announced today that they are opening five new Embassies and many Consulates, from China and India to El Salvador and South Sudan. This two minute clip from the Foreign Secretary’s speech to the House of Commons today could make a good lesson starter for a revision session on trade, the capital account, comparative advantage, government intervention for competitive advantage, and so on.
I am encouraging my A2 pupils to make better use of macroeconomic data to support their points. I have found the TradingEconomics website very useful for providing an up-to-date selection of indicators for a wide range of countries.read more...»
An expansionary monetary policy (also known as a relaxation of monetary policy) means an attempt to use monetary policy to boost or reflate aggregate demand, output and jobs.
Typically this involves a central bank cutting official policy interest rates. It might also involve a relaxation of credit controls and in some countries, Quantitative Easing has been used involving the creation of new money by the Central Bank to purchase debt from banks and boost their capacity to lend to individuals and businesses.
The Bank of England cut official policy rates from 5.5% in the early autumn of 2008 to 0.5% in February 2009 in a bid to stabilise confidence and demand during the descent into recession. Quantitative easing worth £200bn (or 12% of UK GDP) has also been used to provide an extra flow of funds in the UK banking system in a bid to unfreeze credit supply and support an economic recovery.
A fall (depreciation) in the exchange rate is also an expansionary monetary policyread more...»