Economics. Dr. Pass Christopher
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In order for a currency depreciation to ‘work’, four basic conditions must be satisfied:
(a) how successful the depreciation is depends on the reactions of export and import volumes to the change in relative prices, i.e. the PRICE ELASTICITY OF DEMAND for exports and imports. If these volumes are low, i.e. demand is inelastic, trade volumes will not change much and the depreciation may in fact worsen the situation. On the other hand, if export and import demand is elastic then the change in trade volume will improve the payments position. Balance-of-payments equilibrium will be restored if the sum of export and import elasticities is greater than unity (the MARSHALL-LERNER CONDITION);
(b) on the supply side, resources must be available, and sufficiently mobile, to be switched from other sectors of the economy into industries producing exports and products that will substitute for imports. If the economy is fully employed already, domestic demand will have to be reduced and/or switched by deflationary policies to accommodate the required resource transference;
(c) over the longer term, ‘offsetting’ domestic price, rises must be contained. A depreciation increases the cost of essential imports of raw materials and foodstuffs, which can push up domestic manufacturing costs and the cost of living. This in turn can serve to increase domestic prices and money wages, thereby necessitating further depreciations to maintain price competitiveness;
(d) finally, a crucial requirement in underpinning the ‘success’ of the above factors and in maintaining long-run equilibrium is for there to be a real improvement in the country’s industrial efficiency and international competitiveness. (See ADJUSTMENT MECHANISM entry for further discussion.) See BALANCE-OF-PAYMENTS EQUILIBRIUM, INTERNAL-EXTERNAL BALANCE MODEL, PRICE ELASTICITY OF SUPPLY. Compare APPRECIATION 1.
2 the fall in the value of an ASSET during the course of its working life. Also called amortization. The condition of plant and equipment used in production deteriorates over time, and these items will eventually have to be replaced. Accordingly, a firm is required to make financial provision for the depreciation of its assets.
Depreciation is an accounting means of dividing up the historic cost of a FIXED ASSET over a number of accounting periods that correspond with the asset’s estimated life. The depreciation charged against the revenue of successive time periods in the PROFIT-AND-LOSS ACCOUNT serves to spread the original cost of a fixed asset, which yields benefits to the firm over several trading periods. In the period end BALANCE SHEET, such an asset would be included at its cost less depreciation deducted to date. This depreciation charge does not attempt to calculate the reducing market value of fixed assets, so that balance sheets do not show realization values.
Depreciation formulas base the depreciation charge on the HISTORIC COST of fixed assets. During a period of INFLATION, however, it is likely that the REPLACEMENT COST of an asset is likely to be higher than its original cost. Thus, prudent companies need to make provision for higher replacement costs of fixed assets. See INFLATION ACCOUNTING, CAPITAL CONSUMPTION, APPRECIATION 2.
depressed area an area of a country suffering from industrial decline, resulting in an UNEMPLOYMENT rate that is significantly higher, and a level of INCOME PER HEAD that is significantly lower, than the national average. This situation can be tackled by REGIONAL POLICIES aimed at encouraging new firms and industries to locate in the area by offering them financial and other assistance. See ASSISTED AREA.
depression a phase of the BUSINESS CYCLE characterized by a severe decline (slump) in the level of economic activity (ACTUAL GROSS NATIONAL PRODUCT). Real output and INVESTMENT are at very low levels and there is a high rate of UNEMPLOYMENT. A depression is caused mainly by a fall in AGGREGATE DEMAND and can be reversed provided that the authorities evoke expansionary FISCAL POLICY and MONETARY POLICY. See DEFLATIONARY GAP, DEMAND MANAGEMENT.
deregulation the removal of controls over economic activity that have been imposed by the government or some other regulatory body (for example, an industry trade association). Deregulation may be initiated either because the controls are no longer seen as necessary (for example, the ending of PRICE CONTROLS to combat inflation) or because they are overly restrictive, preventing companies from taking advantage of business opportunities; for example, the ending of most FOREIGN EXCHANGE CONTROLS by the UK in 1979 was designed to liberalize overseas physical and portfolio investment.
Deregulation has assumed particular significance in the context of recent initiatives by the UK government to stimulate greater competition by, for example, allowing private companies to compete for business in areas (such as local bus and parcel services) hitherto confined to central government or local authority operators. See COMPETITIVE TENDERING.
Conversely, government initiatives can be seen to have promoted regulation insofar as, for example, the PRIVATIZATION of nationalized industries has in some cases led to greater regulation of their activities via the creation of regulatory agencies (such as Ofgas in the case of the gas industry and Oftel in the case of the telecommunications industry) to ensure that the interests of consumers are protected.
derivative a financial instrument such as an OPTION or SWAP the value of which is derived from some other financial asset (for example, a STOCK or SHARE) or indices (for example, a price index for a commodity such as cocoa). Derivatives are traded on the FUTURES MARKETS and are used by businesses and dealers to ‘hedge’ against future movements in share, commodity, etc., prices and by speculators seeking to secure windfall profits. See LONDON INTERNATIONAL FINANCIAL FUTURES EXCHANGE (LIFFE), STOCK EXCHANGE.
derived demand the DEMAND for a particular FACTOR INPUT or PRODUCT that is dependent on there being a demand for some other product. For example, the demand for labour to produce motor cars is dependent on there being a demand for motor cars in the first place; the demand for tea cups is dependent on there being a demand for tea. See MARGINAL REVENUE PRODUCT, FACTOR MARKETS, COMPLEMENTARY PRODUCTS.
deseasonalized data see TIME SERIES ANALYSIS.
design rights the legal ownership by persons or businesses of original designs of the shape or configuration of industrial products. In the UK, the COPYRIGHT, DESIGNS AND PATENTS ACT 1988 gives protection to the creators of industrial designs against unauthorized copying for a period of ten years after the first marketing of the product.
Fig. 44 Devaluation. A devaluation of the pound against the dollar.
devaluation an administered reduction in the EXCHANGE RATE of a currency against other currencies under a FIXED EXCHANGE-RATE SYSTEM; for example, the lowering of the UK pound (£) against the US dollar ($) from one fixed or ‘pegged’ level to a lower level, say from £1 = $3 to £1 = $2, as shown in Fig. 44. Devaluations are resorted to by governments to assist in the removal of a BALANCE OF PAYMENTS DEFICIT. The effect of a devaluation is to make IMPORTS (in the local currency) more expensive, thereby reducing import demand, and EXPORTS (in the local currency) cheaper, thereby