Friday, July 1, 2016

Brexit and exchange rates. A simple example.

Another short example of the effect "Brexit" has on trade in terms of the export and import of a finished goods from the UK .

The British Pound Sterling just before Brexit was trading at $1.45 (approx)---To "buy" one Pound you had to "pay" $1.45US for it.

So, if you wanted to buy a good in the UK that was priced at 100 Pounds, you had to give up $145.00US dollars to purchase it.

Today post-Brexit the exchange rate is $1.33.  So to buy that same good for 100 Pounds, you would only have to give up $133.00.  Due to the change in the exchange rate, the UK is "on sale"---you save $12.00 or 8.3%.

Ceteris Paribus, this will serve to INCREASE imports to the US from the UK (vice versa, exports will INCREASE for the UK) for those holding US dollars---Law of Demand--as price goes down, quantity demanded increases.

So, how about in the other direction?  Before Brexit, for Brits to "buy" one US Dollar they had to "pay" .69 of Pound to purchase it (this is the reciprocal of the $1.45 from above).

If a Brit wanted to buy a good in the US that was priced at $100 Dollars, they would have to give up 69 Pounds to buy it.

Today, post-Brexit the exchange rate is .75 pounds (reciprocal of $1.33). To buy that $100 Dollar good now costs the Brit 75 Pounds.  Due to the exchange rate, the US is now more costly. Brits pay 6 Pounds or 8.7% more.

Ceteris Paribus, this will serve to DECREASE exports from the US (and DECREASE imports to the UK) for those holding Pound Sterling---Law of Demand---price increases, quantity demanded decreases.

Bottom line: British Jaguars are less expensive so the US may/will IMPORT more of them and the British may/will EXPORT more of them.  US Cadillacs are more expensive so the US may/will EXPORT less of them and the British may/will IMPORT fewer of them.

Trade as illustrated by changes in the exchange rate(s).  Hope this helps!

Tuesday, June 28, 2016

Brexit offers an opportunity for a short FOREX lesson.

The British Pound Sterling has taken a beating in the span of a few short days.  It went from about $1.46 (at times higher) to a low of $1.32.

Much of the commentary has been about holders of Pounds fleeing the currency and into a "safehaven". This means they are exchanging Pounds for other currencies in order to (1) hold cash in that currency or (2) purchasing a safe(r) asset with that currency (gold, bonds, etc).

The Foreign Exchange Market is a big part of the AP Macroeconomics curriculum.  It is one of the harder things to teach and I think one of the more difficult things for students to grasp.  After all, it is not something we routinely encounter in daily life BUT it does make its presence known in all facets of our economic lives.

Below I put together some slides illustrating a part of what happened with "BREXIT" in the UK and how students should understand the graphing elements as it pertains to an AP Macro class.

Hope it helps!!!

NOTE: The next slide has a typo.  Should be "RECIPROCALS".  Thanks.

When "structural unemployment" is actually a job creator---Bank teller edition.

One of the hardest things about teaching an introductory principles course like AP Economics is that, to a large degree, you have to teach many basic concepts in a fairly rigid manner.  I suppose it is a function of the AP test at the end of the year that always looms large over our heads.

The term "structural unemployment" has several meanings and definitions, but the AP curriculum/test is specific in what they are looking for---workers who lose their jobs due to advances or implementation in/of technology.  It has been, in some form, a question on the AP test for some time.

Example: The rise of ATM's reduces the need for bank tellers.  I use this example when trying to make the concept concrete to students.

I recently came across this blog entry (AEI) that to some extent "debunks" the nominal notion of structural changes due to technological advancement as a job killer:
"""...What happened? Well, the average bank branch in an urban area required about 21 tellers. That was cut because of the ATM machine to about 13 tellers. But that meant it was cheaper to operate a branch. Well, banks wanted, in part because of deregulation but just for deregulation but just for basic marketing reasons, to increase the number of branch offices. And when it became cheaper to do so, demand for branch offices increased. And as a result, demand for bank tellers increased...."""
So, yes, ATM's did reduce the need for tellers at ONE specific bank.

However, an unintended consequence is a decrease in the opportunity cost of opening additional branch banks that resulted in the need for MORE bank tellers overall.

The short blog entry at the link above is worth a read for a teacher and/or student. It adds nuance and complexity to a basic concept we teach/learn in a fairly inflexible way.

How depreciation of the Pound Sterling affects the Commoner.

Throughout the past year, the British Pound Sterling has been trading against the US dollar at roughly $1.46 (this is just an eyeball guess--I probably erred a bit on the low side, truth be told).

This means the holder of 1 Pound could exchange it and receive $1.46US.

Today (June 28, 2016) 1 Pound exchanges for $1.32.  Now 1 Pound "buys" $.14 (cents) LESS than it did a week ago.  The Pound Sterling has DEPRECIATED relative to the US Dollar.  It is worth less (not worthless!) than it was before the depreciation

How does can this affect a British citizen at home?

Assume a British importer imports $1,000 worth of Apples from the US.  Before the depreciation the importer had to give up 684.9 Pounds to order to buy the apples ($1,000 divided by the exchange rate for 1 Pound---$1.46US).

After the depreciation, the importer has to give up 757.6 Pounds in order to buy the apples ($1,000/ divided by the exchange rate for 1 Pound---$1.32US).

That is a difference of 72.7 Pounds or a 10.6% increase in the price the importer pays.  How do they make up for this?  Either they cut expenses elsewhere, take the loss in profits or increase the price of apples.

This is a quite unsettling sudden shock development for importers and/or domestic consumers of foreign goods and services.

However, it does not only affect importers of finished goods like apples that go directly to consumers for consumption.  The same analysis above applies to British businesses that purchase foreign INPUTS for the production of a domestic good and/or service.

If a British baker buys US apples to use in the production of apple pies, they face the same situation---an increase in the cost of production.  What to do--cut expenses, take the loss in profits or increase the price of apple pies?  Sound familiar?

Bottom line: Depreciation of a currency can (ceterus paribus) lead to broad increases in prices---Inflation.  There are LOTS of caveats with this so take it with a grain of salt.

Hopefully salt not purchased with a depreciating currency.

Sunday, June 26, 2016

What is the right Minimum Wage? In typical Economics fashion: "It depends"

When I am asked whether or not we should have a higher minimum wage my answer is usually something like "a wage that helps all low/no skilled workers concerned and does not harm any current or future low/no skilled workers".  Admittedly not very helpful.

I put together some slides with explanations of how I try to objectively view the issue.  There maybe a sweet spot for the minimum wage.  Where that is, well, I fall back onto "it depends".  I think that is actually the best answer.

I hope this helps someone, teacher or student.  Feel free to comment.

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