Economics 2 Assignment: UK Economic Growth and Exchange Rates

This report, prepared for an Economics 2 course, delves into the dynamics of economic growth and exchange rates within the UK economy. It examines the factors driving economic growth, including technology advancements and investment, while also considering associated drawbacks such as infl...Read More

ECONOMICS

Economics
Contents
Answer 3............................................................................................................................................2
Answer 4............................................................................................................................................4
References.............................................................................................................................................6
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Answer 3.
Economic growth is considered when level of output rises, GDP changes, along with the
change in real national income. During the boom period, a country’s level of aggregate
demand goes up which ultimately increases the output and economic growth takes place.
There are certain causes of economic growth including technology upgradation, higher
capital investment, labour quality and quantity etc.
Benefits of Economic Growth in UK:
There are various benefits of economic growth like, increased GDP, output, decreased
unemployment rate, reduced government spending, better infrastructure and public services
etc. (CliffsNotes, n.d.).
in the year 2016, when UK decided to withdrew its membership from European Union an
economic slowdown was predicted in terms of fall in aggregate demand. However, opposite
happened and the economy of UK witnessed economic growth in terms of improved
employment rate (Extract B). even, after the BREXIT referendum the GDP of UK went up by
0.4% in Quarter 3, 2019. UK’s economic growth went up speedily from Jul to the month of
September, 2019 after experiencing 0.2% negative growth in the month of April to June,
2019. Output related to production, service and construction all grew in 2019 by 0.1%, 0.5%
and 1.2% respectively in the year 2019 (Mitic, 2020).
Drawbacks of Economic Growth in UK:
There are various benefits associated with the economic growth. Still, there also exists few
costs attached to the economic growth like, rise in inflation, problems related to balance of
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payments, environmental problems like congestion, pollution, inequality in income
distribution, declined quality of life etc.
There are various drawbacks of economic growth suffered by UK as a result of referendum.
From the year 2017, GDP of UK has constantly declined till 2019 as compared to the average
GDP of other advanced economies. The unemployment rate has also fallen below the natural
equilibrium rate and business investment has become weaker and lowest in G7 economies.
Apart from this, unit labour cost has also gone up in UK along with fall in exchange rate
(Nabarro and Schulz, 2019). Due to prevailing business uncertainty, the UK economy is 3%
smaller than what it would have been without opting out from EU. According to the Brexit
statistics, UK’s annual economic growth has declined from 2% to 1% as a result of its
referendum decision taken in the year 2016. Prior to the decision of referendum, the British
pound was $1.48 dollars but after that it dropped to $1.36 in 2016 and then $1.30 on an
average in the month of December, 2019 and January, 2020. the country had to bear a heavy
cost for leaving EU and this cost amounts to £130 billion which is suspected to grow by £70
billion by the 2020 end. Brexit also had left a deep impact on the economy of UK. Employers
in UK are facing massive problem of filling the vacant positions. Therefore, bounded by the
situation employers have raised the starting salary to attract and filled the required positions.
Even UK will have to bear high cost of trading because earlier when it was membered with
EU it was able to execute trade with more than seventy countries without any requirement to
pay tariffs on many of the goods (Mitic, 2020).
Economic growth has many obvious benefits however the desirability depends upon many
factors such as; the nature of growth, is the growth sustainable? Does it harm the
environment? However, rather than trying to stop economic growth, it is better to concentrate
on improving the nature of economic growth and being aware that many factors determine
the desirability of economic growth.
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Answer 4.
Exchange rate refers to the price at which one pound can buy the US dollars or any other
foreign currency. For example: 2 dollars may be equal to one pound then to purchase 2
dollars UK would require to pay one pound.
Supposed Effect of Pound Depreciation On UK’s Trade Deficit
Exports and imports of any country are significantly affected by the change in exchange rate
and therefore UK’s exports and imports are also affected by the same. So, when the economy
of UK experiences depreciation in their currency Pound it should positively affect the
country’s trade deficit. Trade deficit is when the import of any country exceeds its total
exports. Therefore, depreciation in Pound should affect the UK’s trade deficit in the
following ways:
1. Depreciation in pound means one pound can only purchase fewer dollars and
therefore pound has become weaker
2. Now, UK’s export would be benefitted by this depreciation. The cost of producing
any particular product would be same after the depreciation in pound. However, the
final price of the product would be now cheaper for the countries with stronger
currency. Therefore, British goods will witness a hike in their demand. In this way,
depreciation in pound should positively affect the export figure (Pettinger, 2019).
3. This depreciation in UK’s pound would not be so good news for the importers. Now,
importers cost of importing finished goods, raw materials, etc. would rise which will
ultimately have an impact on the cost of producing a product. Therefore, those
manufacturers who depends on foreign countries with stronger currency for their raw
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materials and other products their production cost will rise. This would adversely
affect the profit margin of the manufacturers who imports. Apart from this, the
consumers who import the final product from the countries with stronger currencies
had to pay a higher price for the product (Bitesize, n.d.).
Actual effect of Pound Depreciation on UK’s Trade Deficit
As per the rule of currency rate effect depreciation in pound should positively impact the
trade deficit by reducing it to a required and acceptable level. Studies have shown that UK’s
export has not gone up as per the expectation of currency rate effect. Rather export of UK has
fallen down instead of going up. The importers in UK are also required to cut their profit
margin as a result of rise in cost of production. In 2018, trade deficit of UK has widened to
the level that was never ever witnessed by the country in the last many years. In 2017, trade
deficit of UK was £25bn and then in 2018 it rose to £37.7billion (The Guardian, 2016). UK’s
growth in export has drastically slowed down since 23 June 2016 the time when the country
decided to leave EU. This fall in UK’s export has remained same irrespective of export has
been made to EU countries or non-EU countries. UK’s products like cars or chocolates
requires importing of Japanese engines and cocoa of Ivory island respectively. These raw
materials are now proving highly expensive for the importers of UK after currency
depreciation. This significant rise in cost of import has also limited the advantage for
exporters out of pound’s depreciation. Since the vote to leave EU the currency of UK crashed
eight per cent and six per cent against the dollar and euro respectively and has therefore
widened the trade deficit of UK (Dmitracova, 2019).
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References
Bitesize. (n.d.). How UK business competes internationally. Available at:
https://www.bbc.co.uk/bitesize/guides/zd987ty/revision/4 (7 March, 2020).
CliffsNotes. (n.d.). What are the advantages and disadvantages of Gross Domestic Product?.
Available at: https://www.cliffsnotes.com/cliffsnotes/subjects/economics/what-are-the-
advantages-and-disadvantages-of-gross-domestic-product (7 March, 2020).
Dmitracova, O. (2019). The Brexiteer fantasy was that a weak pound would boost the
economy. Reality tells a very different story. Available at:
https://www.independent.co.uk/voices/brexit-pound-sterling-fall-no-deal-boris-johnson-trade-
a9145701.html (7 March, 2020).
Mitic, I. (2020). UK Economy Statistics and Facts: What Happens After Brexit?. Available
at: https://fortunly.com/statistics/uk-economy-statistics/#gref (7 March, 2020).
Nabarro, B. and Schulz, C. (2019). Recent trends to the UK economy. Available at:
https://www.ifs.org.uk/publications/14420 (7 March, 2020).
Pettinger, T. (2019). Effect of the exchange rate on business. Available at:
https://www.economicshelp.org/blog/9328/business/effect-exchange-rate-business/ (7 March,
2020).
The Guardian. (2016). UK trade deficit with EU hits new record. Available at:
https://www.theguardian.com/business/2016/may/10/uk-trade-deficit-hits-new-record-of-24bn-
pounds-eu-referendum-brexit (7 March, 2020).
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