Learning effect – definition, explanation

learning-effect-

The learning effect can mean one of two things How education leads to increased productivity and higher wages How production processes can learn from past production to increase productivity over time. The learning effect can lead to a learning curve – which represents how average costs of production change over time. Learning effect – Education …

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How to reduce our dependence on fossil fuels

External costs from pollution

Despite the urgency of climate change and the rapid fall in the price of renewable energy sources, the world still relies on nearly 80% of its energy source from fossil fuels. Accelerating the shift away from fossil fuels will have large environmental and economic benefits, yet progress is much slower than we need. The problem …

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Why inflation makes it easier for government to pay debt

national-debt-1910-2022-points

Reader’s Question: Why Does Inflation Make it Easier for Governments to pay back the debt?   The big fall in national debt as % of GDP occurred during relatively high inflation periods of 50s, 60s, and 70s. The 1920s and 30s were a period of deflation and high debt. There are a few reasons inflation …

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Impact of higher wheat prices

supply-fall-rise-wheat

Higher wheat prices will have a significant impact on raising food prices and reducing living standards; it is feared it could cause widespread poverty and social unrest. The impact of higher wheat prices will be felt disproportionately by low-income consumers and major wheat importing countries, such as Egypt and Nigeria. This is because consumers on …

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What is the difference between depreciation and inflation?

pound-sterling-er-index-1980-2020-with-depreciations

Readers’s question: What is the difference between depreciation and inflation? Depreciation refers to a fall in the value of an asset. A depreciation of the exchange rate means a currency becomes worth less than others. For example, the Pound sterling falls in value against the dollar/euro/Yen. This graphs shows that the value of the Pound …

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Factors determining the price of wheat

wheat-prices-1990-2022-labels

Wheat is the fifth most commonly traded commodity after oil, coffee, gas and gold. It accounts for approximately 21% of the world’s food and the gross world trade in wheat is greater than all other crops combined. Wheat is a key ingredient of bread, flour, and pasta, and is also used in the production of …

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Understanding exchange rates

Factors affecting exchange rate

A summary for understanding exchange rates. Factors that affect exchange rates and the impact of exchange rates on the economy.

Terminology

  • Depreciation/devaluation – fall in value of exchange rate – exchange rate becomes weaker (see also: definition of devaluation and depreciation)
  • Appreciation – increase in the value of exchange rate – exchange rate becomes stronger.

Example of Pound Sterling depreciating against the Dollar

  • £1 used to equal $2.
  • Now £1 is only equal to $1.75

Video on Exchange rates

What is the effect of a depreciation in the value of the Pound?

devaluation-winners-losers

  • Buying goods from America becomes more expensive.
  • If a meal cost $10, it used to require £5 (10/2) for a British tourist.
  • But, now after the depreciation, the $10 meal will cost £5.71 (10/1.75)
  • The depreciation in the pound may discourage British tourists to travel to the US.
  • It makes US imports into the UK more expensive, so it may reduce UK imports
  • UK exports will become relatively more competitive. It is cheaper for Americans to buy UK goods, so the quantity of exports should increase.
  • UK inflation will increase. Imported goods are more expensive (cost push inflation). Also, British goods are more attractive causing a rise in demand (demand pull inflation)

Summary of depreciation

  • A depreciation in exchange rate makes exports more competitive and imports more expensive
  • A depreciation helps UK exporters and improves UK growth prospects, but causes higher prices and inflation.

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