Exchange Rate and Mervyn King

king: Mervyn King, the previous governor of the Bank of England, hailed the lower exchange rate as a welcome change . Indeed, with Britain current-account deficit running above 7% of GDP – by far the largest since data started being collected in 1955 – depreciation could be regarded as a boon, according to The Guardian. But is it Economists would typically argue that the way to balance a country external accounts is through a fall in its currency, which would make imports more expensive and exports cheaper, causing the former to fall and the latter to rise. Since June, the pound has fallen by 16% against a basket of currencies. Higher import prices – a net loss for the country – would be offset by the higher employment and wages generated by the more competitive position of the country exports. For example, a recent paper by Francesco Aiello, Graziella Bonanno, and Alessia Via of the European Trade Study Group finds that the long-run level of exports appears to be unrelated to the real exchange rate for the UK . This means that British consumers and producers will have to bear the entire brunt of devaluation: their import consumption will be rationed through a sharp rise in price inflation, with no offsetting gain for exports. But in order for currency depreciation to work its magic, more demand for exports must be forthcoming when the exchange rate falls . But various studies have shown that the price elasticity of demand for UK exports is low. (news.financializer.com). As reported in the news.