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!
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