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I wonder if the fallacy here is to expect the balance of trade to respond too quickly to changes in the exchange rate. I'm no expert in this area, but old habits die hard.  If you've always bought a particular brand of whatever you tend to continue buying it unless there is a really sudden, noticeable and major increase in price.

So if the UK is still buying/importing  more or less the same goods/service as it did a year ago - and paying up to 18% more for them - you would expect the balance of payments to actually worsen in the short and medium term.  Ditto with UK exports, if exporters aren't passing on cost reductions enabled by devaluation or if overseas buyers aren't buying any more of them even if they are cheaper.

In the longer term, of course, you would expect UK exports to increase and imports to reduce, in volume if not in value terms (expressed in Euro). But that also assumes that British exporters are geared up to ramp up production in response to increased demand. Given "goods" as opposed to services are such a small proportion of overall exports, the effect could be quite marginal on the economy as a whole. It will take a very long time before any increase in goods exports makes up for the loss of services exports to the EU when UK institutions lose their passporting rights.

So years from now, "economists" will still be wondering why the UK economy responded so little and so slowly to the devaluation stimulus - much as they wonder now at the continued absence of inflation. None seem to think the UK class structure, the lack of governmental fiscal stimulus or the destruction of Trade Union bargaining power has any role in all of this. Of course we know better!

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Aug 22nd, 2017 at 03:53:22 PM EST
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