Impact of the pound falling on the household
The Brexit referendum led to the fall of the value of the British pound. This research paper discusses the impacts of the pound falling on households. It looks at the major causes of the pound falling which include inflation, growth and interest rates. The main aims of the research are to examine the possible correlation between a falling currency and the household behavior. Additionally, create an analysis of the possible recommendations that ensue from the results of the economic decline. The study findings include;
- There is a relationship between a falling currency and household behavior. A fall in currency increases the level of inflation which in turn increases the prices of goods and services, especially for the imported products.
- The possible solutions to the economic decline in the UK include rejoining the EU and contributing so that they access the EU market and avoid negative impacts of Brexit. Other solutions also include controlling interest rates, taxes, and expenditure on goods and services.
The value of the British pound is a pre-determined phenomenon of factors such as inflation, interest rates, and growth. Countries with stronger economies tend to have currencies of a higher value. The states’ ability to have a stable currency arises from the fact that investors trust that the countries will grow financially in the future and therefore, they invest their funds into the countries. On the other hand, countries with a weaker currency always have very few organizations and individuals invest in them since an ailing economy assures no future trust of funds. When people make investments in a country, they require the foreign currency for investment. For instance, in Britain, any investor, whether foreign or local, would need the sterling pounds for the businesses. An increase in the demand for the sterling pounds increases the value of the sterling. Likewise, a decrease in the demand for the sterling pound in Britain implies a corresponding decline in the value of the pound(Denton, 2016).
The interest rates charged by a country for any businesses also determine the strength or weakness of the pound(Dhingra, et al., 2016, p. 3). High-interest rates lead to higher profits, and the vice versa is true when lower interest rates charges ensue. High return rates, therefore, attract more global and local investors to the economy, and in the short and long run, the value of the sterling pound in Britain rises. A country that shows an ability to bloom in the future attracts more investors to it. As a result, more organizations globally would invest in the country since there is thefuture security of the funds. Consequently, a state with weak growth and no signs of aneconomicboom in the future scares potential investors away and in turn leads to a low value of the currency. Another factor that affects the value of a currency is inflation. Inflation refers to the general rise in prices of goods and services with a corresponding decrease in the purchasing power of money. In Britain, there are two ways in which a high inflation reduces the value of the sterling pound(Chu, 2016). First, when there is a high inflation in the UK, it would lead to an increase in prices of products above the price levels of the European goods and services(Dhingra, et al., 2016, p. 2). The products then become less competitive in themarket and lower the demand for UK imports. A decline in the demand for exports means a reduction in the demand for UK pounds. Secondly, when inflation increases and the prices of goods and services also go up, UK consumers’ preferences will shift to those of European products. To purchase European products, British people would supply their sterling pounds for them to buy Euros for making European purchases and imports. As a result, the pound value will fall(Bunn, et al., 2015).
Brexit refers to “British Exit,” a referendum held in the United Kingdom states, where the people voted whether British should remain a member of the European Union or whether it should quit. The Brexit referendum happened on 23rd June 2016 in the UK. The results were released, and it turned out that a majority of the people, 52%, voted for the state to leave the European Union. Since the referendum had to be respected, British moved out of the European Union.
Since British left the European Union, its economy and the value of the sterling pound has never remained the same. Exiting from the union led to an increase in inflation rates which meant high prices of goods and services. In turn, these activities lowered the demand for the pound and therefore, its value dropped down significantly in 2016. EU had 28 member states which all used a common currency in themarket, the Euro. However, during the purchase of goods and services or even in times of investing in Britain, the member states had to buy the sterling pounds. The latter increased the demand for the British pound and thereby enhanced the value of the sterling pound. When the country left the EU, they lost the opportunity to trade with its member states and add value to its currency. Leaving the EU has had severe impacts on the currency, the economy and the households as well(Merrick, 2016).
The research question in theinvestigation for this research paper is:
What is the impact of the pound falling on the household?
The research mentioned in thequestion is suitable for study since there are someadverse effects of the falling pound in British on not only the economy but also the households in British. The topic’s research and analysis emerge from both qualitatively and qualitatively approaches. It is also one of the current issues in question which is suitable for this research.
The objectives of the study include;
- To identify the relationship between a falling currency and the household behavior
- To examine the possible solutions to economic decline
The two study objectives are appropriate for the research question under investigation. These two objectives would guide in the gathering of information for the research which will later prove useful in the qualitative and quantitative analysis, recording and draw conclusions.
Null Hypothesis (Ho) – There is no significant impact of the Pound falling on households
Alternative Hypothesis (HA) – There are significant impacts of the falling pound on household
The quantitative analysis of this research will be done based on questionnaires sampled to members of households. Six different households were selected at random and used for thesurvey. They included two lower class families, twomiddle-class families and the other two were fromupper-class families. The classes of the families selected regarded the income earned by each household. Those earning more were the upper class; themiddle-class families had average income while the low-class families earned below the minimum required to sustain a family in the UK.
The survey questions used for the questionnaires were easy to understand and simple to answer. Each respondent filled a questionnaire independently depending on his or her insight on the impact of the pound falling on households. The survey’s timescale projection followed on different days following the schedule on the Gantt chart so as to have enough time to gather the responses from various households. All the six families responded to all the survey questions and therefore, dynamic analysis of the results will be done in this research paper.
The survey questions used are indicatedin Appendix I
The first question on the survey was; “Did you vote to leave the European Union? The question was relevant in for the research since the Brexit referendum is one of the major factors that contributed to the falling of the pound. All the six households from the sampling of the research reacted to the question. The majority of them agreed that they voted and this means that a significant number of the citizens in Britain voted their country out of the European Union. The responses of the survey to this question’s representationdisplayin the pie chart below.
Another critical question on the questionnaire was to find out if the members of the households sampled were affected by the falling of the pound. All the six households had the same answer to this question. They were all affected by the impacts of the pound falling and according to the respondents; this was majorly due to the Brexit referendum which voted British out of the European Union. A very high percentage of the households used for survey agreed that their income was affected by the fall of the pound (See Appendix III)
Since the Brexit referendum took place, the value of the pound has fallen significantly against the dollar by nearly 20%. The fall of the pound, in turn,has led to rising inflation due to increase in the prices of imported goods. Households and businesses suffer the impacts of the falling pound, and a further fall of the pound would cause adverse effects to them. Reports show that the rates of inflation were at 0.6% in August and by September the inflation rates had risen to 1%. Economists give a general impact of inflation on households, but in reality, different households experience different impacts of inflation according to their consumer prices and preferences on goods and services. The purchasing power of consumers depends on their income and the choice they make when purchasing products and services. It is, therefore, necessary to identify the impacts of inflations on households according to different households which are low class, middle and the wealthy families.
Low-income families are hitharder by the rising prices of food than the richer households. It is so because low income households spend a higher percentage of their earnings on food. Most of the foods that these households purchase proceed from theimported products. When the value of the pound falls, a relative rise in inflation occurs which leads to increased prices of goods and services. In this case, importing foods from other countries would be more expensive, and to maintain the profits earned from the sales of foods, sellers increase the food prices. As a result, the poor households will have to spend more on purchasing food. On the other hand, high-income households do not spend a larger proportion of their income on food and therefore, would not be affected by the rising prices of imported foods for the low-income families. Wealthy families, apartfrom food, spend their earnings on buying vehicles and fuel. A change in inflation rates affects the prices of fuel and imported cars. An increase in inflation rates would mean a rise in the prices of imported vehicles and increase in the prices of fuels. Thewealthy families majorly use These two products and therefore, the impacts of their prices rising would be less felt by poor households.
The hypotheses tested in this research are a basis of the inquisition whether there was a significant impact of the pound falling on the households:
HO: There is no significant impact of the pound falling on the households.
H1: There is a significant impact of the pound falling on the households.
A chi-square test analysis was carried out during the research based on the two hypotheses (See Appendix II). The resultsof tests’ measurement range at 5% significance level. The test statistic was 2.403 with degrees of freedom of 2. The critical value at 5% significance level was 0.3007.The test statistic is, 2.403, is higher than the critical value 0.3007. We,therefore, reject the null hypothesis, H0,which states that ‘there is no significant impact of the pound falling on households.’In turn, we accept the alternative hypothesis which states; there are significant impacts of the pound falling on households.
The qualitative analysis of this research paper is a report of secondary sources, majorly from websites. News reports, written reports and journals and a few books have been using the research and analysis of the impact of the pound falling on the households. Various articles supervened, following the Brexit referendum and its effects on individuals, companies and the economy of Britain in general.
“A weaker pound also means UK businesses have to pay more for goods they buy in foreign currencies, making imports more expensive”(The Economist, 2016). According to news updates on ‘The Economist’ website, the fall of the pound in British will lead to inflation which in turn leads to the increase in prices of goods and services. The impact is directly felt by households since they purchase imported products. The news also states that a weaker pound would affect people differently depending on their income and activities(The Economist, 2016). Particular people only do some of the activities affected by the falling pound. For example, the affluent households use vehicles, fuels and afford holiday tours more than the individuals from poor households can. As a result, when prices of vehicles and fuel go up, it would only affect the wealthyhouseholds more. On the other hand, low-income families spend a larger portion of their income on food compared to more prosperous families and therefore, when the prices of food go up, they are more affected by its impact than other people(The Economist, 2016).
Brian Milligan reported in the BBC knew that a fall in the value of the pound would affect households living in rented accommodation(Milligan, 2016). Following the Brexit impacts on people residing in Britain, the overall costs of goods and services would go up. Landlords of rented accommodation are also part of the consumers who purchase the goods and services which have increased prices due to inflation. For the owners to maintain or gain the purchasing power of these products, they raise the rents for the houses they rent. In turn, the effect of the falling pound would be felt directly by the people who will either have to pay more for accommodation or shift to other areas for accommodation(Milligan, 2016).
Since the Brexit referendum is one of the major contributors to the economic decline in Britain, it would be necessary to adopt solutions to the Brexit’sadverse impacts which would, in turn, solve economic decline in Britain. One of the suggestions to solve the Brexit crisis is by David Davis(Henley, 2016). He suggested that the British government should keep sending contributions to the EU for it to access the single market of the Union but with no extra benefits of being a full member of the European Union. In this way, Britain would be able to trade freely with other countries of the EU and would,therefore; the economic crisis that followed the exit from EU would be solved(Henley, 2016).
The second solution to the economic decline in the UK would be to reduce the rates of inflation to avoid hiking prices of goods and services in the country. Various policies can reduce inflation. One way is to use the exchange rate policy whereby the UK would increase the value of its currency and make it more valuable. The monetary policy can be used to check for the levels of inflation in different sectors of the country and make the government know where to adjust to reduce inflation. The fiscal policy can also be used to control the expenditure and the taxes imposed on products and thus controlling inflation rates(Ball, 2012, p. 515).
The Brexit referendum led to the fall of the pound. Since the Brexit, some factors contributed to the falling of the pound. Some of the factors include inflation, change in interest rates and growth. Countries with a weaker currency are bound to have fewerinvestors.On the contrary, the states with a stronger currency attract investors globally.The affinity precedes from the fact that investors feel more secure investing where the currency is stronger. In Britain, the falling of the value of the pound affected various sectors of the country including businesses, immigration, and households. Different households are affected differently with the pound falling. For instance, poor households are more affected by the increases in prices of food than the richer families since they spend a larger portion of their income on food. On the other hand, inflation leads to increase in prices of products and activities such as vehicles, fuels and holiday tours and this only affects the wealthy who can afford them. The economic decline of the UK as a result of the reduction of the pound falling is rectifiable through contributions to the EU to access a single market. The strength or the weakness of the pound from the study above emerges through a continuous process of regulating interest rates, expenditure and the taxes imposed on goods and services.
Ball, L., 2012. UK e-Book for Money, Banking, and Financial Markets.Basingstoke, United Kingdom: Palgrave Macmillan.
Bunn, P., Drapper, L., Rowe, J. & Shah, S., 2015. The potential impact of higher interest rates and further fiscal consolidation on households: evidence from the 2015 NMG Consulting Survey.BankofEngland, pp. 357-368.
Chu, B., 2016. 7 ways the fall in the value of the pound affects us all.[Online]
Available at: http://www.independent.co.uk/news/business/news/pound-sterling-value-dollar-euro-drop-latest-how-will-it-affect-me-holidays-travel-a7344861.html
[Accessed 5 March 2017].
Denton, J., 2016. Half of UK households worried about Brexit’s impact on finances and nearly a third think their job could be at risk. [Online]
Available at: http://www.thisismoney.co.uk/money/news/article-3754669/Half-UK-households-worried-Brexit-s-impact-finances-nearly-think-job-risk.html
[Accessed 5 March 2017].
Dhingra, S., Ottaviano, G., Sampson, T. &Reenen, J. V., 2016. The consequences of Brexit for UK trade and living standards.[Online]
Available at: http://cep.lse.ac.uk/pubs/download/brexit02.pdf
[Accessed 5 March 2017].
Dhingra, S., Ottaviano, G., Sampson, T. & Reenen, J. V., 2016. Brexit: the impact on UK trade and living standards. [Online]
Available at: http://cep.lse.ac.uk/pubs/download/cp469.pdf
[Accessed 5 March 2017].
Henley, J., 2016. Can the UK adopt the ‘Norway model’ as its Brexit solution?. [Online]
Available at: https://www.theguardian.com/politics/2016/dec/01/can-the-uk-adopt-the-norway-model-as-its-brexit-solution
[Accessed 5 March 2017].
Merrick, R., 2016. Every household will lose £1,250 a year because of Brexit, says Institute for Fiscal Studies. [Online]
Available at: http://www.independent.co.uk/news/uk/politics/brexit-economic-impact-uk-autumn-statement-debt-loss-household-1250-institute-for-fiscal-studies-a7437131.html
[Accessed 5 March 2017].
Milligan, B., 2016. How will Brexit affect your finances?. [Online]
Available at: http://www.bbc.com/news/business-36537906
[Accessed 5 March 2017].
The Economist, 2016. Some Britons will suffer from a weak pound more than others. [Online]
Available at: http://www.economist.com/news/britain/21708904-effect-sterling-inflation-some-britons-will-suffer-weak-pound-more-others
[Accessed 5 March 2017].
Answer the questions below by placing a Tick in one of the choices provided
Did you vote to leave the European Union?
According to the income earned in your household, which category can you rate your household?
High-IncomeModerate Income Low Income
Has the Brexit referendum affected the amount of income you earn?
Has the Brexit affected how you spend your income?
What do you think the impacts of the Brexit and the pound falling on households would be like in future?
Better Worse No change
THANK YOU FOR COMPLETING THIS SURVEY
CHI-SQUARE TEST ANALYSIS
|1. Contingency table
2. Expected cell frequency
3. Chi-square distribution table
Degrees of freedom =3-1
Chi-square test statistic = 2.403