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Phaedrus

Economics Lesson

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I'm struggling here to get my head around some basic economic concepts, prompted by the thread on rising cost of raw materials. If the good(and clever) of HPC can help me out I would be extremely grateful.

It's about the link of inflation to interest rates. This is how I'm thinking of it, if it's wrong then please correct and educate me.

Raw material costs from overseas increase, so the cost of making things and consuming these materials rises. This fuels a rise in inflation(I suppose inflation is a measure in the rise in the cost of living??). This is bad, because it implies a lowering of standards of living(our purchasing power is reduced). Reducing interest rates feeds consumption, so the monthly bill for our consumption rises, also it makes the UK less attractive to foreign investors, so more pounds are sold than bought causing a further weakening of our purchasing power, higher import costs and the cycle repeats.

However, raising rates, reduces consumption, makes the UK more attractive to overseas investors, results in more pounds bought than sold, strengthens the pound and keeps a lid on inflation.

Hang on though, with a weak pound aren't British goods and services more attractive for the export market?

A bit simplistic, I know, but is that basically correct?

Edited by Phaedrus

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I'm struggling here to get my head around some basic economic concepts, prompted by the thread on rising cost of raw materials. If the good(and clever) of HPC can help me out I would be extremely grateful.

It's about the link of inflation to interest rates. This is how I'm thinking of it, if it's wrong then please correct and educate me.

Raw material costs from overseas increase, so the cost of making things and consuming these materials rises. This fuels a rise in inflation(I suppose inflation is a measure in the rise in the cost of living??). This is bad, because it implies a lowering of standards of living(our purchasing power is reduced). Reducing interest rates feeds consumption, so the monthly bill for our consumption rises, also it makes the UK less attractive to foreign investors, so more pounds are sold than bought causing a further weakening of our purchasing power, higher import costs and the cycle repeats.

However, raising rates, reduces consumption, makes the UK more attractive to overseas investors, results in more pounds bought than sold, strengthens the pound and keeps a lid on inflation.

Hang on though, with a weak pound aren't British goods and services more attractive for the export market?

A bit simplistic, I know, but is that basically correct?

:) yup

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At the risk of the blind leading the partially sighted, here is my two-penneth worth.

A weak pound is certainly good for some export-led sectors. But in others it is more of a mixed blessing: any export firm dependent upon exporting goods or services which are assembled/produced from goods and or services that are themselves imported will not find a weaker pound all that helpful in increasing the competitiveness of their produce.

Take, for example, a machinery manufacturer (OK, not many of these left in the UK...): if their raw materials/components come in from China, then a decrease in the pound will render their raw materials more expensive. This may in turn lead to them having to increase the pound cost of their exported finished products, and so mitigate the competitive advantage of the weaker pound.

The same holds true for invisibles and services too: those programmers in Bangalore performing back-office functions for city banks start costing more in pounds as the pound falls.

More pertinently politically is that Mr and Mrs Swing Voter suddenly find that their 3 bed semi in Watford won't buy them a small castle in Spain/Croatia/Bulgaria* (*delete as appropriate) and their son Master Swing Voter finds his holiday money doesn't go as far as he thought on a lads weekend out in Prague. This sense of the UK getting poorer may counteract some portion of the economic stimulus of a weaker pound.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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