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Trade weighted index

Trade weighted index

A trade weighted index is used to measure the effective value of an exchange rate against a basket of currencies. The importance of other currencies depends on the percentage of trade done with that country. For example in calculating the trade weighted index of the Pound Sterling, the most important exchange rate would be with the Euro. If the UK exports 60% of total exports to the EU, the value of £ to Euro would account for 60% of the trade weighted index. A trade weighted index is useful for measuring…

Free_Trade_Areas

Trading blocks – Pros and cons

Trading blocks are groups of countries who form trade agreements between themselves. Trading blocks can include Free trade areas – elimination of tariffs between economies in the trading block Customs union – free trade area + a common external tariff with non-members Economic union/Single market – Customs union + common rules and regulations. Different types of trading blocks Trade blocks are important for…

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Transaction costs

Definition – A transaction cost is any cost involved in making an economic transaction. For example, when buying a good or buying foreign exchange, there will be some transaction costs (in addition to the price of the good.) The transaction cost could be financial, extra time or inconvenience. Transaction costs could involve. Paying a margin to an intermediary. For example, when buying foreign exchange a broker may take a commission of 0.5% of total purchase. Search costs. When purchasing foreign exchange, you will look around for the dealer with best commission rate. …

Utility maximisation

Utility maximisation

Utility maximisation refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions. For example, when deciding how to spend a fixed some, individuals will purchase the combination of goods/services that give the most satisfaction. Utility maximisation can also refer to other decisions – for example, the optimal number of hours for labour to supply their labour. Working more increases income, but reduces leisure time. Classical economics Utility maximisation is an important concept in classical economics. It developed from the utilitarian philosophers of Jeremy Bentham and…

Variable Costs

Variable Costs

Variable costs are costs which change with output. As output increases the firm needs to use more raw materials and employ more workers. These costs vary with changes in the output. Variable costs exclude the fixed costs which are independent of output produced. Examples of variable costs Raw materials. Aluminium, plastic, rubber, coffee beans. All the materials used in the productive process are variable costs Labour costs. If a firm increases output, it will need to employ more workers to produce more. If a taxi firm takes on more drivers to…

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Working Out Compound Interest  

Compound interest is when the interest from a loan is added to the initial amount causing ever higher levels of interest to be charged. The principles of compound interest can also be applied to savings If the interest rate is 100r % per period. After 1 periods an original loan of A amounts to A(1+r) After 2 periods the loan amounts to A(1+r) 2 After three periods the loan amounts to A (1+r) 3 After N…

x-inefficiency

X Inefficiency

X Inefficiency occurs when a firm lacks the incentive to control costs. This causes the average cost of production to be higher than necessary. When there is this lack of incentives, the firm will not be technically efficient. In theory, the firm could have an average cost curve at “Potential AC” but due to organisational slack, it’s actual average costs are higher. The difference between actual and potential costs is the x-inefficiency. X Efficiency would occur be when competitive pressures cause firms…

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Yen carry trade

A currency carry trade occurs when people borrow in one currency and invest in another country. For example, suppose Japanese interest rates are 0% and US interest rates are 5%. In this case an investor can buy Yen and borrow from a Japanese bank at 0% interest. He can then exchange Yen for Dollars and put the money in a European bank, gaining 5% interest on his savings. Therefore, in theory, he can make a profit of 5% on the difference between Japanese and European interest rates. Many investors took part in…