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The following table shows a selection of exchange rate indices (effective exchange rates) for the years 2011 to 2020, based on 2011 = 100.
\r\n| \r\n \r\n | \r\n\r\n 2011 \r\n | \r\n\r\n 2012 \r\n | \r\n\r\n 2013 \r\n | \r\n\r\n 2014 \r\n | \r\n\r\n 2015 \r\n | \r\n\r\n 2016 \r\n | \r\n\r\n 2017 \r\n | \r\n\r\n 2018 \r\n | \r\n\r\n 2019 \r\n | \r\n\r\n 2020 \r\n | \r\n
| \r\n Australian $ \r\n | \r\n\r\n 100.0 \r\n | \r\n\r\n 102.92 \r\n | \r\n\r\n 98.18 \r\n | \r\n\r\n 92.39 \r\n | \r\n\r\n 85.21 \r\n | \r\n\r\n 84.03 \r\n | \r\n\r\n 86.31 \r\n | \r\n\r\n 82.54 \r\n | \r\n\r\n 78.82 \r\n | \r\n\r\n 77.43 \r\n | \r\n
| \r\n US $ \r\n | \r\n\r\n 100.0 \r\n | \r\n\r\n 103.33 \r\n | \r\n\r\n 106.20 \r\n | \r\n\r\n 109.11 \r\n | \r\n\r\n 125.17 \r\n | \r\n\r\n 125.97 \r\n | \r\n\r\n 124.84 \r\n | \r\n\r\n 121.94 \r\n | \r\n\r\n 126.12 \r\n | \r\n\r\n 124.89 \r\n | \r\n
| \r\n Japanese yen \r\n | \r\n\r\n 100.0 \r\n | \r\n\r\n 102.54 \r\n | \r\n\r\n 83.08 \r\n | \r\n\r\n 76.60 \r\n | \r\n\r\n 72.43 \r\n | \r\n\r\n 81.74 \r\n | \r\n\r\n 78.12 \r\n | \r\n\r\n 77.94 \r\n | \r\n\r\n 81.31 \r\n | \r\n\r\n 82.30 \r\n | \r\n
| \r\n Sterling \r\n | \r\n\r\n 100.0 \r\n | \r\n\r\n 104.38 \r\n | \r\n\r\n 101.83 \r\n | \r\n\r\n 108.00 \r\n | \r\n\r\n 115.04 \r\n | \r\n\r\n 102.05 \r\n | \r\n\r\n 95.67 \r\n | \r\n\r\n 96.12 \r\n | \r\n\r\n 95.70 \r\n | \r\n\r\n 94.77 \r\n | \r\n
| \r\n Euro \r\n | \r\n\r\n 100.0 \r\n | \r\n\r\n 93.97 \r\n | \r\n\r\n 99.03 \r\n | \r\n\r\n 99.26 \r\n | \r\n\r\n 89.19 \r\n | \r\n\r\n 91.08 \r\n | \r\n\r\n 93.65 \r\n | \r\n\r\n 96.77 \r\n | \r\n\r\n 94.08 \r\n | \r\n\r\n 94.79 \r\n | \r\n
| \r\n S Korean won \r\n | \r\n\r\n 100.0 \r\n | \r\n\r\n 100.53 \r\n | \r\n\r\n 108.53 \r\n | \r\n\r\n 115.72 \r\n | \r\n\r\n 118.84 \r\n | \r\n\r\n 114.17 \r\n | \r\n\r\n 116.96 \r\n | \r\n\r\n 118.01 \r\n | \r\n\r\n 113.58 \r\n | \r\n\r\n 110.79 \r\n | \r\n
Source: Based on data from Monthly Effective Exchange Rate Indices (narrow) (Bank for International Settlements, April 2021)..
\r\n(a) Explain what is meant by an exchange rate index or an effective exchange rate.
\r\n(b) Calculate the annual rate of appreciation or depreciation for each currency for each year from 2011. It is suggested that you use an Excel spreadsheet.
\r\n(c) Calculate the percentage appreciation or depreciation of each currency when comparing 2020 with 2010.
What will be the effects on the domestic economy under free-floating exchange rates if there is a rapid expansion in world economic activity? What will determine the size of these effects?
Compare the relative effectiveness of fiscal and monetary policy under (a) fixed; (b) free-floating exchange rates.
Assume a free-floating exchange rate. Draw a diagram like Figure 25.6, only this time show an initial equilibrium national income with a balance of payments surplus.
\r\n(a) Mark the size of the surplus.
\r\n(b) Show the resulting shifts in the (X–M) and the E curves.
\r\n(c) Mark the eventual equilibrium.
\r\n(d) Show the size of the income and substitution effects (of the change in the exchange rate).
\r\n(e) Under what circumstances will the income effect be (i) ‘desirable’; (ii) ‘undesirable’?
\r\n(f) Could the income effect of the change in the exchange rate ever be larger than the substitution effect?
What is meant by the concept of ‘learning by exporting’?
Was a ‘hard Brexit’ (reverting to WTO rules and negotiating bilateral trade deals) necessarily an inferior alternative for the UK to remaining in the European single market or, at least, in the customs union?
Look through the costs and benefits that we identified from the completion of the internal market. Do the same costs and benefits arise from the enlarged EU of 27 members?
Why is it difficult to estimate the magnitude of the benefits of completing the internal market of the EU?
What factors will determine whether a country’s joining a customs union will lead to trade creation or trade diversion?
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