Economics help blog – Page 40

Russian economy facing economic crisis

2 March 20221 March 2022 by Tejvan Pettinger

Russia is a medium sized economic with a GDP of $1.48 trillion (USD) about half the size of the UK $2.7 trillion (2020) The strengths of the economy is based on exports of oil and natural gas. And with these sales, since 2014, Russia has built up foreign currency reserves of $630bn – a large …

The impact of economic sanctions – do they work?

27 February 202225 February 2022 by Tejvan Pettinger

Economic sanctions are policies designed to hurt the economy of a target country. Sanctions can involve trade embargoes, seizure of assets, travel bans and limits on capital flows. The aim of sanctions is usually to provide a political signal of disapproval which stop short of military action. They can be imposed by one country unilaterally, …

Economic impact of war

8 March 202224 February 2022 by Tejvan Pettinger

Putting aside the very real human cost, war has also serious economic costs – damage to infrastructure, a decline in the working population, inflation, shortages, uncertainty, a rise in debt and disruption to normal economic activity. From some perspectives, war can appear to be beneficial in terms of creating demand, employment, innovation and profits for …

The impact of inflation in developing economies

23 February 2022 by Tejvan Pettinger

Inflation is a sustained rise in prices and increase in the cost of living. The general costs of higher inflation will be reduced purchasing power of money, fall in the value of savings, a depreciation in the exchange rate, less certainty for firms and the inconvenience of dealing with changing prices. In addition, developing economies …

Why is cost of living in UK so expensive?

17 July 202222 February 2022 by Tejvan Pettinger

house-price-earnings-ratio-uk-regions-1996-2021

Readers Question: Why is the cost of living in the UK so expensive? The cost of living depends on: The price of basic necessities – food, fuel, heating, transport, housing/rent, entertainment. The effective cost of living also depends on real wages. It is expensive to live in Nordic countries, but real wages tend to be …

List of Gross External Debt by Country

24 February 202211 February 2022 by Tejvan Pettinger

External debt is the total public (government) and private debt owed to non-residents repayable in internationally accepted currencies, goods, or services. This is gross (total) external debt. It does not measure net debt.

External debt is different to measures of public (government) debt. See: List of national debt by country.

Some countries with very high levels of external debt, also have very high levels of external credit. For example, Ireland, United Kingdom, Switzerland and Singapore have high levels of assets – i.e. they hold the external debt of other countries. In fact, they are net international creditors because there assets are greater than their debt levels.

Countries with large banking systems tend to have higher levels of external debt because they correspondingly hold more international assets. The problem comes when the assets they hold fall in value.

However, some countries can have high external debt because of past borrowing requirements and high levels of government debt. For example, Greece has one of the highest levels of external debt 298% of GDP. This is largely due to the debt crisis of 2010 onwards where Greek debt became overwhelming and they required foreign borrowing.

External debt can be problematic for developing countries if interest payments on their external debt levels impact on a countries ability to invest and spend on current public services.

Biflation – definition and explanation

14 March 202228 January 2022 by Tejvan Pettinger

us-inflation-cpi-cpi-food-energy-2000-2021

Biflation is a term used to describe a period where some prices are rising and some prices are falling. It can appear we have both inflation and deflation at the same time. CPI = Headline inflation rate CPI less food and energy = underlying or core inflation. In the above example, the headline rate is …

What happens to value of currency during recession?

2 October 202216 January 2022 by Tejvan Pettinger

Readers Question: What will happen to the value of a currency during times of deep recession and high inflation?

There is no hard and fast rule about what will happen to the value of a currency during a deep recession – though, a currency is likely to fall because country becomes a less attractive place to invest. For example, when the great recession started in 2008, the UK experienced a significant depreciation.

The Pound Sterling fell over 25% from 2007 (before the start of the great recession) to July 2009

But the Euro and Dollar were less affected by the great recession.

The US dollar index (which shows the value of the US dollar against a trade-weighted basket of other currencies, e.g. Euro and Yen) has fluctuated but overall has remained at similar value to the start of the recession.

Note in early 1980, the US went into recession, but during this period the value of the Dollar rose.

It was a similar experience in the UK, in the 1980s, In 1980, there was a rapid appreciation in Sterling (which was one factor contributing to the recession of 1980/81.)

2022 Recession

The Pound Sterling has been sliding during 2021/22 and towards the end of 2022, it looks like UK economy is heading into recession.

Economic theory behind the value of a currency in recession

Suppose one country, e.g. the UK, enters a deeper recession than all its other competitors. How might we expect the currency to behave?

Recession and interest rates. If the UK enters a recession, then we would expect UK interest rates to fall compared to other countries. This would make the UK less attractive for investors to save money. Hot money flows are likely to leave the UK and move to countries with higher interest rates. If people move money out of the UK, they will sell Pounds and buy other currencies, causing a fall in the value of Sterling. Therefore, in theory, we might expect a recession to cause a fall in the value of the currency.

Evaluation

1. In a recession, inflation is likely to fall. Lower inflation will help the country become more competitive, and this may increase demand for the currency causing it to rise.

2. Many factors affect the value of a currency. For example, if the UK had a large current account deficit, then we might expect this trade deficit to put downward pressure on the currency. The fall in the value of Sterling in 2008 was partly related to the UK’s trade deficit and lack of competitiveness. However, if a country like Germany entered a recession, they may be less downward pressure on their currency (the Euro) because Germany has a large current account surplus.