## Effect of a Fall in the Value of the Pound on Price Levels in the UK

Suppose that imports account for 20% of spending in the UK, and the value of the pound falls by 30%. What effect foes this have on the level of prices in the UK?
If the value of the pound fall by 30% then then value of imports in pound increases by a factor of
$\frac{1}{1-0.3} \simeq 1.43 \equiv 43 \%$
. In pounds therefore, without any change in consumer behaviour, the number of pounds spent will increase by a factor of
$0.8+0.2 \times 1.43==1.086$
, and wages will have to rise by 8.6% to maintain the real level of spending, so the fall in the value of the pound leads directly to an 8,6% average rise in prices.