Bernice Berschader

                                The Euro

(a) With reference to the passage, examine the benefits of a strong pound against the euro to:

(i) British consumers

As a result of a strong Pound and a weaker Euro British consumers have benefited greatly.

Britons travelling to Europe have found their value of money has increased, they have been experiencing ‘a formidable spending boost’.  This is as a result of the wealth effect, the price of the euro in Sterling is cheap as a result increasing their spending power.  Consumer surplus expands as a result  and more goods can be bought in the EU for the same amount of Sterling compared to the UK. For example they have been able to buy small 3 to 4 bedroom cottages and a couple of acres of land for £150,000, which they would be unable to purchase at such a price back home. According to the article Britons have been able to save 15% on such purchases. The low interest rates in the EU and the stable European currency has proved to be unfounded. Due to low interest rates, Britons are encouraged to save less, a smaller fraction of each additional pound that they earn. This will result in the marginal propensity of consumption increasing and the marginal propensity of saving declining.  A fall in saving will result in an increase in demand and a rise in effective disposable incomes. These factors combined will increase the demand for assets such as housing and shares.

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(ii) the economies of Italy and France

The weakness of the euro relative to the pound also reaps benefits for EU countries such as Italy and France. The number of British Tourists into these two countries has rocketed due to the low prices relative to the UK. The article states that the number of British tourists in France has risen by 31% and by 54% in Italy.  The increase in demand for holidays in these two destinations has had a ripple affect to a number of industries within the 2 countries. The restaurants, supermarkets, real-estate and many other industries ...

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