The Interest Rate Transmission Mechanism

The Balance of Payments: Surplus

If interest rates fall, we would expect the exchange rate to depreciate. This would mean that exporters in the UK would now be more competitive (Px↓); foreigners will have to give up fewer $ to get the same amount of £s, whilst imports will appear to be more expensive Pm↑). (UK buyers will have to give up more £s to get the same amount of $). We would expect the demand for imports to fall and the demand for exports to rise. The next animation illustrates the result of this process.

You can start and stop/reset the animation using the buttons provided or by tabbing to the animation and pressing s to start and q to stop. The main introductory page features further accessibility information on these resources.

The animation would display two sets of counter values in pounds - one for export earnings, the other for import expenditure for the UK. Goods are represented by different coloured boxes, which flow between the UK and US representing imports and exports. As the goods flow, the counter values begin to rise. The end of the animation shows the level of export earnings at £80 and the level of import expenditure also at £60 to illustrate a surplus on the balance of payments for the UK.

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