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Is the fall in sterling good for the UK economy?

Graham Watson

11th July 2022

The eminent economist Barry Eichengreen highlights here the damage that the weakening of the pound is likely to cause the UK economy.

Here is a memorable quote! "Traders appear to view sterling more like the currency of a troubled emerging market than of a stable advanced economy.”

Superficially, you might think that more price competitive exports is a good thing with export growth perhaps helping to offset weakening domestic demand in the UK as real incomes drop.

But think about the flip-side, namely more expensive imports and a potential loss of confidence in the UK economy. Many exports also require imports, so the gains in price competitiveness if sterling weakens against the Euro and the US dollar might be offset by climbing import costs.

Remember, empirically, the UK economy has always done better with a strong pound.

The Eichengreen article is also available via Project Syndicate and we have linked to this below.

This tutor2u revision video explore some of the micro and macroeconomic effects of a severe currency depreciation using the Turkish economy as context.

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to tutor2u, reads voraciously and is interested in all aspects of Teaching and Learning.

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