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Stephen Says...

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sharing occasional thoughts about things that interest me

Sterling and the ONS

the state of the countryPosted by Stephen Tue, November 15, 2016 17:24:39

On October 28th 2016 the ONS published a piece concerned with the implications of changes in the exchange rate for sterling ( In this article it says: “A fall in the pound means that UK exports will be cheaper for customers in other countries to buy. This should help UK companies increase the amount of goods and services they sell to the rest of the world which would bring more money into the UK – potentially increasing employment, growth and therefore living standards.” But this is utterly flawed.

Data extracted from past issues of the ONS “UK trade in goods publication tables” unambiguously give the lie to the article’s assertion.

Here they are:

The figures indicate that devaluation of sterling in conjunction with the Great Financial Crisis was substantial: from $2.00 in 2007 to $1.55 in 2010; a fall of 22%. In consequence, the traded goods price index for imports went from 76.2 in 2007 to 92.0 in 2010; a rise of 21%. Meanwhile the traded goods price index for exports went from 75.6 in 2007 to 92.7 in 2010; also a rise of 23%. So neither in absolute nor in relative terms did UK exports become cheaper as a result of this substantial devaluation.

In fact these data are precisely in line with what ought to be expected. In reality, the prices of all tradable products are set in the global market-place and denominated in $US. Then these global prices, which apply both to UK imports and to UK exports, are translated into sterling via the exchange rate. Hence both the prices of exports (when expressed in sterling) and the prices of imports (when expressed in sterling) will rise as a consequence of sterling’s depreciation.

Before posting this, I took a look at the most recent version of the ONS balance of payments database and calculated the correlation coefficient for the series giving prices of exports (BQAJ) and imports (ELAZ): it was +0.99. And this ought to come as no surprise since, according to the 9th November issue of the ONS "UK trade in goods publication tables", you only need eight types of product to account for more than half of UK exports and you only need the same eight to account for more than half of the UK’s imports as well. The categories are: Mechanical machinery; Cars; Medicinal & pharmaceutical products; Electrical machinery; Other miscellaneous manufactures; Scientific & photographic equipment; Crude oil and Refined oil. So no wonder prices of imports and exports move together: their prices are those of the same types of products and come from the same world markets.

The price relativity which actually does change as a result of devaluation is that between traded goods, for which prices are determined in world markets, and non-traded goods (such as places in residential care homes), for which prices are determined locally (i.e. directly in sterling). Hence the major economic consequence of exchange rate change is a rebalancing of the economy between the traded and the non-traded sectors (as their relative prices are altered by alteration of the exchange rate). A fuller consideration of this analysis, incorporating detailed estimates of the relevant relative magnitudes (based on the ONS Supply & Use Tables), is available at:

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