Evaluate the possible impact on UK macroeconomic performance of a sustained rise in the value of the pound sterling against the euro and the US dollar

The UK operates with a floating exchange rate system where the forces of market demand and supply for a currency determine the daily value of one currency against another. A sustained rise in the value of the pound against the euro/US dollar can have important effects on the economy. An appreciation of the exchange rate raises the price of exports and reduces the prices of imports, which can have adverse effects on the macro-economy.

Firstly, due to the appreciation of the price of exports, the demand of them will significantly decrease. Therefore, will have detrimental effects upon exporters, as it would damage profits and employment in some sector notably manufacturing industry in ...

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be possible to increase production without encountering an increase in costs. In addition, firms will not require an extreme abundance of stuff, therefore may cut back and promote unemployment, once again, damaging the macroeconomic performance. Individuals will not have less purchasing power and disposable income to inject in the circular flow of income. This will all accumulate and cause a decrease in the total output, expenditure of consumers or income of an economy which will cause a reduction in real GDP growth after adjusting for changes in the price level. Evidently, this will have a unfavourable impact on economic growth which is a key indicator of macroeconomic performance. However, the extent to which this is a problem depends on the price elasticity of demand for exports. If the demand for exports is price elastic an appreciation of the exchange rate will lower the value of exports, which in turn will reduce AD, economic growth and employment.

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Evaluate the possible impact on UK macroeconomic performance of a sustained rise in the value of the pound sterling against the euro and the US dollar. (2011, April 28). Retrieved October 16, 2018, from http://www.essayworld.com/essays/Evaluate-possible-impact-UK-macroeconomic-performance/98594
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"Evaluate the possible impact on UK macroeconomic performance of a sustained rise in the value of the pound sterling against the euro and the US dollar." Essayworld.com. April 28, 2011. Accessed October 16, 2018. http://www.essayworld.com/essays/Evaluate-possible-impact-UK-macroeconomic-performance/98594.
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PAPER DETAILS
Added: 4/28/2011 03:17:01 PM
Submitted By: kkhan_93
Category: Economics
Type: Premium Paper
Words: 906
Pages: 4

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