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Economics Essays

Firstly, a depreciation of a currency; such as the ‘pound sterling’ in the United Kingdom, can be defined as a fall in the external value of the currency in relation to another currency of another country. This was seen recently as a result of the Brexit referendum of June 2016, in which the British population voted to leave the European Union. Subsequently there was a decline in foreign business confidence in UK industry and the value of the sterling. Yet, the depreciation of a currency can be seen as incredibly beneficial to an economy for the subsequent reduction in the current account defecit and the balance of payments, which too lends itself as a vital component of macroeconomic policy making. A depreciation in a nations currency stimulates an increase in the amount of exports, as goods become relativly cheaper to other countries. This is illustrated by the outward shift of the aggregate demand curve from AD1 to AD2 with the rise in real GDP from Y1 to Y2 emphasisng the positive export-led growth that derives from a depreciation of a currency. Export-led growth as a component of aggregate demand is seen as more sustainable than consumption-led growth, since a rise in exports can promote improvements in productivity and efficiency, in order for a country to a ccomodate to rise demand from abroad, similarly reflected by the movement along the aggregate supply curve denoted AS. Nevertheless, to state this as always being a benefit to the economy is farfecthed, due to the inflationary pressure shown from the rise in price level from GPL1 to GPL2. This example of cost-push inflation is reflected by how it becomes oppositly more relativly expensive for the nation to import goods after a depreciation. This developement of inflation has the possibility of causing a negative multiplier effect in which domestic propensity to consume will fall as domestic goods rise in price, causing increases in aggregate demand to be offset by a fall in consumption.