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British pound to US dollar exchange rate (value of one pound in dollars), June 2017 to June 2019 - Edexcel - A-Level Economics A - Question 3 - 2021 - Paper 2
Question 3
British pound to US dollar exchange rate (value of one pound in dollars), June 2017 to June 2019. Which one of the following has been the overall change in the Brit... show full transcript
Worked Solution & Example Answer:British pound to US dollar exchange rate (value of one pound in dollars), June 2017 to June 2019 - Edexcel - A-Level Economics A - Question 3 - 2021 - Paper 2
Step 1
Which one of the following has been the overall change in the British pound to US dollar exchange rate from 1st January 2018 to 1st January 2019?
Answer
To answer this question, we first need to analyze the graph presented, which shows the exchange rate of the British pound against the US dollar over the specified period.
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Identifying the Exchange Rate: From January 1, 2018, the exchange rate of the British pound appears to be around 1.35. By January 1, 2019, the rate has decreased to approximately 1.25. This indicates a decline in the value of the pound relative to the dollar.
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Understanding the Concepts:
- Appreciation means an increase in value. Since the pound has fallen, this option is incorrect.
- Depreciation means a decrease in the value of the currency, which matches our findings.
- Devaluation typically refers to a deliberate reduction in a fixed exchange rate, which does not apply here as the pound-dollar exchange is floating.
- Revaluation is the opposite of devaluation; hence, it is also incorrect.
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Conclusion: Based on this analysis, the only correct answer is B) Depreciation.
Step 2
3(b) Explain how the change in exchange rate may impact the UK economy.
Answer
A depreciation in the pound affects the UK economy in several ways:
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Current Account Improvements:
- A decreasing pound generally leads to an increase in exports since UK goods become cheaper for foreign buyers, thus improving the current account balance.
- Conversely, imports may decrease as foreign goods become more expensive for UK consumers.
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Application of Data: The exchange rate data shows a depreciation from January 2018 to January 2019, which supports this effect of increased competitiveness of UK exports.
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Additional Economic Theories:
- This situation can be explained by the Marshall-Lerner condition, which states that a depreciation will improve the trade balance if the sum of the price elasticities of exports and imports is greater than one.
- Furthermore, the J-Curve effect indicates that the beneficial effects of currency depreciation may not be immediate but will improve in the long run as consumers adjust their purchasing habits.