Evaluate whether Miri needs to make changes to his business as a result of the Pound sterling depreciating 10% against the Chinese Renminbi in 2016. You should use the information provided as well as your own knowledge of the business*. 12 marks. * - ...After 2 weeks, Miri had sold most of his stock and he felt confident enough to make a second order. The business grew from there. Miri now sells a variety of purity jewellery: from rings to bracelets and earrings to necklaces. All his stock is imported from China and all of his customers are from the UK. Miri doesn't sell abroad. He is now thinking of expanding his business by renting some office space and investing in a new website. This will, however, require a loan from the bank.

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Here is a sample answer to this question: "Evaluate the possible impact of a depreciation of the sterling exchange rate against leading currencies on key macroeconomic objectives."

A depreciation of sterling would occur inside a free-floating currency system and has happened on several occasions in the past most notably in June 2016 when the pound’s external value fell in the immediate aftermath of the Brexit referendum result. The sterling effective exchange rate depreciated 20% between November 2015 and October 2016, including a record 6.5% fall between June and July 2016 following the EU referendum vote. The effective exchange rate is an index weighted by the percentage of trade that the UK does with individual countries and trading blocs.

The impact of a depreciation on macro objectives depends on the scale, duration and timing of a currency fall and also the strength of the transmission mechanism from currency movement to other indicators. This essay will look at three objectives namely, sustained GDP growth, low stable price inflation and an improvement in the trade balance in goods and services.

Explanation:

In theory a fall in the currency is a monetary stimulus to an economy open to international trade and investment. A weaker pound increases the sterling price of imported products and this increase in relative prices ought to improve the price and cost competitiveness of domestic suppliers in the UK. It also allows UK exporters to lower their prices (expressed in a foreign currency) and hopefully achieve an expansion of overseas sales. The combined effect of this is to stimulate aggregate demand (where AD = C+I+G+X-M) and provide a short-term fillip to economic activity. In the summer of 2016, the fall in sterling helped the UK to avoid the full-blown recession that some analysts had predicted. Growth slowed but remained positive and the weaker pound injected extra demand in industries such as tourism and transport. Manufacturing was assisted with a more competitive exchange rate although this sector accounts for only ten percent of total UK GDP.

If exports rise following a depreciation, this can be shown by an outward shift of aggregate demand (as shown in my analysis diagram) leading to an expansion of short-run aggregate supply. A weaker currency can act as a useful shock absorber when a country experiences unexpected turbulence.

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