The exchange rate measures the external value of sterling against another currency
A Weaker Yen Helps Japanese Exports and GDP Growth
Japanese exports have been rising for a fourth month in a row in June, boosted by a weak yen and a revival in demand from Europe. Exports rose 7.4% from a year earlier and sales to the European Union (EU) rose by 8.6%.
The Japanese yen has weakened 25% against the US dollar since November last year after a series of aggressive policy moves by Japan. A weak currency makes Japanese goods cheaper for foreign buyers. Meanwhile, imports into Japan rose 11.8% from a year ago, resulting in a trade deficit of 180.8bn yen (£ 1.2bn).
Source: Adapted from news reports, 2013
How can changes in the exchange rate affect the rate of inflation?
The exchange rate affects the rate of inflation in a number of direct and indirect ways:
Bank of England research suggests that a10% depreciation in the exchange rate can add up to 3% to the level of consumer prices three years after the initial change in the exchange rate. But the impact on inflation of a change in the exchange rate depends on what else is going on in the economy. For example a lower pound is unlikely to have the same inflationary effects during a recession.
Evaluation points on the effects of exchange rate changes
Changes in the exchange rate have quite a powerful effect on the economy but we tend to assume ceteris paribus – all other factors held constant – which of course is highly unlikely to be the case
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