Economics help blog – Page 244

Why Are UK Retail Sales Increasing? (2008)

15 January 202024 April 2008 by Tejvan Pettinger

Readers Question: explain why two sectors of the UK economy are growing faster than other sectors ?

According to the Office of National Statistics for March 2008

Retail Sales Volume Seasonally Adjusted (2000=100) increased to 140.3 an annual growth rate of 4.7%
Manufacturing grew at only 0.9%
Services grew at 3.2%

I have to admit I was a little surprised to see retail sales increase at 4.7%. Anyway it seems that retail sales and the service sector are still doing much better than manufacturing and production. These are some potential reasons.

Exchange Rate. Against the dollar, at least, the Pound has been strong. This makes our exports more expensive reducing demand. Manufacturing goods are often exported so would explain weakness of manufacturing sector. Imported goods become cheaper so may boost sales on the high street.

However, the pound has been weak against the Euro, our main trading partner, so I doubt how important this factor is.

Interest rates. The Bank of England has cut interest rates to 5%. In theory this should boost spending because it makes borrowing cheaper. This would explain increased retail sales and services because consumers will have more spending power.

However, the cuts in base rates have often not been passed on by banks. The credit crisis has led to a tightening of lending restrictions. This is why I was a little surprised to see retail sales growing so strongly.

Australian Dollar and British Pound

23 April 2008 by Tejvan Pettinger

Readers Question:. (i) On 1 March, AUD1 = GBP 0.42. On 1 July, AUD1 = GBP 0.45. Your company exports native flowers to British florists. You signed a contract on March 1 to sell 10 tonnes of flowers at AUD 385 per tonne, to be delivered on July 1. Explain how the exchange rate movement …

Predictions for the Euro 2009

22 April 2008 by Tejvan Pettinger

Readers Question: Buying a new property in Montengro

215,000 Euros’s
paid 30% at exchange 1.47 to pound August 2007
20% due in 2-3 months. 43 ,000 euros
today exchange is bad news approx 1.23 to pound
further 30% due around Nov -Dec 2008
20% on completion around April 2009

1.What are your predictions for the pound euro exchange rate at the time points above. June 08 – April 09?

I would be reluctant to stipulate a figure for the Euro / Pound exchange rate, especially with so much resting on your decision. People do talk of an exchange rate of 1 Euro to £1. This is because:

Weakness in UK housing market and UK economy. This could lead to lower interest rates in the UK in the next 12 months. If the UK housing market really collapses as some people fear, the £ will only get weaker.
Chance of Euro becoming worlds’ reserve currency instead of dollar. If central banks made the switch to the Euro, it would continue to gain in strength for a long time.

However, it is worth bearing in mind.

Injecting Money into the Mortgage Markets 2008

15 January 202021 April 2008 by Tejvan Pettinger

Readers Question: The Bank of England has released £15bn into the economy. That increase in the money supply will surely cause inflation? So interest rates having fallen will be raised, worsening the housing market and making the credit crunch even worse, not better….surely? The Bank of England is planning to inject money, primarily into the …

Question on the Closure of Factories

15 January 202018 April 2008 by Tejvan Pettinger

Readers Question: I am studying AS level economics and I have a homework which i’m stuck on. I was wondering what are the pros and cons of the government intervening in market failures such as those resulting from the immobility of labour, negative externalities and greater income inequality, following the closure of factories.

It’s a difficult AS question. Some ideas might include:

Advantages of Government Intervention

The existence of Negative externalities leads to overconsumption. A negative externality causes a harmful effect to a third party. Therefore the social cost is greater than the private cost. However, people ignore the costs to others and so in a free market there is overconsumption. Negative externalities of a factory closing down include the costs to the rest of society in the nearby town. It is not only workers who are adversely affected but local shops.

Immobility of labour can lead to geographical unemployment. i.e. jobs are available but workers find it difficult to move to these areas. Government intervention can subsidise firms who move to areas of high unemployment or subsidise workers who move to areas of low unemployment. This can help overcome market failure in the labour market and reduce the problem of geographical unemployment resulting from a factory closing down.

Question on the effect of Interest rates on Housing and Shares

22 January 202017 April 2008 by Tejvan Pettinger

Readers Question: Hi, Please could you explain this question. Contrast the likely effects of monetary policy decisions on the price of housing and shares. Monetary Policy involves changing interest rates to try and influence aggregate demand and target low inflation and high growth. If inflation was increasing above the government’s inflation target, they would increase …

Australian Dollar Appreciation

15 April 2008 by Tejvan Pettinger

Readers Question: The Aussie dollar has appreciated strongly against the USD in recent times. Discuss the consequences of this rapid appreciation for Australia’s Balance of Payments?

The Australian Dollar has appreciated against the US Dollar because

Large US current account deficit
Australia has benefited from rising commodity prices, commodities which Australia produces a lot of.
US interest rates are lower than Australia and the US economy has been weakening.

April 2008 $1 Aus Dollar = US 0.9300

Effects of AUS Dollar Appreciation

It makes Australian exports more expensive. Therefore there will be a fall in demand for Australian exports.
Imports into Australia will become cheaper, therefore there will be an increase in demand for imports.
This is likely to worsen the current account deficit. However, this assumes that demand for exports and imports is relatively elastic. The Marshall Lerner condition states that if PED of exports + PED of imports > 1 then an appreciation will worsen the current account.
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Question on Repo Rates and Effect on Inflation

10 March 202015 April 2008 by Tejvan Pettinger

2) what is repo and reverse repo rate and its effect on inflation The repo rate is the difference between the purchase price and reselling price of a security, expressed as a percentage. If commercial banks are short of money, they enter into an agreement with the Bank of England to sell their Treasury bills …