Essay: Discuss the economic effects of an appreciation in the exchange rate on the UK manufacturing sector. (15)

An appreciation in the exchange rate means that the value of sterling increases compared to other currencies. Therefore, the price of UK exports will increase and manufactures, which export will become less competitive. Therefore, there will be a fall in demand for their exports, however it depends upon the elasticity of demand. If demand for exports is inelastic, then there will only be a small fall in demand for exports. If demand is elastic there will be a large fall.

In the short term demand is likely to be inelastic but over time consumers may find cheaper alternatives.
Manufactures are becoming less competitive, therefore, they have an increased incentive to cut costs to remain competitive. Therefore, if they do become more competitive then in the long term it may be beneficial for manufacturing companies.

Also firms may decide to produce different goods they could concentrate on goods, which are not sensitive to price changes and have an inelastic demand.

If there is a fall in demand for exports then manufacturing firms will produce less and may get rid of some workers, causing unemployment. However, if demand from domestic consumers is high then this may offset the fall in demand from oversees and firms will keep producing output. Therefore, it depends upon what % of goods a firm exports.

If there is an appreciation in the exchange rate then the price of imports will fall. Therefore, it becomes cheaper for firms to import raw materials. If firms import a lot they will have lower costs of production and this may help them remain competitive.

If there is an appreciation, there is likely to be a fall in AD, causing lower output; this may be exacerbated by the multiplier effect causing lower Real GDP

Therefore, manufacturing firms may face lower domestic demand as well; however the exchange rate is only a small determinant of AD and AD may not fall that much.

Overall, an appreciation in the exchange rate will make it more difficult for manufacturing firms who export. However, they may not suffer in the long run if the produce goods which are inelastic and if they can cut costs to remain competitive.

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