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Last Updated: Monday, 12 November 2007, 13:40 GMT
Economic terms explained
By Alasdair Rendall
Producer, The Pound In Your Pocket

The Pound in Your Pocket graphic
BBC Parliament will screen a series of programmes on devaluation from 1800 GMT on 18 November 2007


Devaluation is a reduction of the value of one currency with respect to another (for example Sterling against the US Dollar).

This usually implies an official lowering of the value of a country's currency in a fixed exchange rate system.

A government will often devalue as a means of boosting a country's exports - as devaluation means that it is cheaper for foreign countries to buy products from the country that has devalued.

Fixed Exchange Rates vs Floating Exchange Rates

A fixed rate is when a currency's value is matched to the value of another single currency (such as against the Dollar), or against a selection of other currencies (such as the European Exchange Rate Mechanism).

A floating exchange rate allows a currency's value to fluctuate according to the whims of the foreign exchange market.

Critics have said that floating exchange rates are preferable to fixed rates as they give a government greater flexibility with their domestic monetary policies.

Conversely, some commentators say fixed exchange rates are preferable, as they lead to greater economic stability.

Balance of Payments

The Balance of Payments marks the deficit in goods and services that are bought and sold.

As well as goods sold abroad, money can come into the country from British companies receiving profits from investing abroad, as well as selling services such as insurance and banking.

James Callaghan
James Callaghan was Chancellor of the Exchequer from 1964-67. He served as Prime Minister from 1976-79.
Trade Figures

The monthly trade figures measure the difference between the value of goods Britain imports from abroad, and the value of British exports.

As domestic consumers buy more overseas goods, this can lead to worsening trade figures.

In the long run, a growing trade deficit can put pressure on the domestic currency, leading to potential interest rate rises to prevent it from weakening.

Reserve Currencies

A reserve currency is a currency that is held in significant quantities by foreign governments.

Governments can buy or sell the money held in reserve currencies as part of the foreign exchange market.

A reserve currency is often the international pricing currency for products traded on a global market, such as oil.

Currently the main reserve currencies are the US Dollar, the Euro, the Japanese Yen - as well as Sterling.

Pound Sterling

Sterling is the world's oldest currency still in use.

It was previously subdivided into shillings and pence, before decimalisation in 1971. It is one of three most popular currencies to be used as reserve currencies.

US Dollar

The US Dollar is arguably the world's strongest currency.

It was adopted by the USA in 1785 and is the most popular reserve currency in use. It is also the currency used to determine the value of many global commodities, such as oil and gold.

The Gold Standard

Until the early seventies, this was the standard measurement of the value of a currency.

Cliff Michelmore
Cliff Michelmore returns to our screens to present the evening of programmes on Devaluation
The international monetary system was backed by gold reserves and allowed currency holders to convert their money into gold. It was first put into practice in the UK in 1821.

In 1971, the US came off the gold standard, and the practice has been dormant ever since.

International Monetary Fund (IMF)

The IMF was formed in 1945 and oversees the global financial system, by observing exchange rates and balance of payments.

It is able to offer financial assistance to struggling countries and currencies; for example in 1976 the British government asked the IMF for a loan.

OECD - Organisation for Economic Co-operation and Development

The OECD is the name given to the organisation representing the world's most economically developed countries.

It was originally designed to help the redevelopment of post-war Europe, but membership was later extended to non-European states.

Based in Paris, the organisation still exists as a means of exchanging ideas between countries on a range of economic and social issues.

Department of Economic Affairs (DEA)

The DEA was briefly a department of the UK government, formed in 1964.

Legend has it that the idea was thought up by Prime Minister Harold Wilson and his deputy George Brown in the back of a taxi.

The department was set up to undertake long-term planning of the economy, leaving short term financial decisions to the Treasury.

It was unable however to compete with the Treasury, and was wound up in 1969.

Selective Employment Tax (SET)

SET was a tax on labour brought in by James Callaghan in the 1966 budget.

It taxed the employment of people in service industries, and subsidised it in manufacturing industries.

It was designed to give a boost to the manufacturing sector, but was ultimately abolished in 1973.

Purchase Tax

Purchase Tax was the forerunner to VAT (Value Added Tax), and was a tax on consumer goods.

It was introduced in 1940 and abolished in 1973 as part of the UK's entry conditions to the EEC. It was a tax on the value of a wide range of goods, but excluding food and services.

During its lifetime there were as many as seven different rates in operation at any one time.

Cliff Michelmore returns to the BBC to follow the story of the ailing pound as the saga unfolded at the time - from devaluation in November 1967 to the Budget of March 1968.

Join Cliff Michelmore for The Pound In Your Pocket at 1800 GMT, Sunday November 18 on BBC Parliament

The programmes in detail
09 Nov 07 |  BBC Parliament
The Cabinet at 1967 Devaluation
12 Nov 07 |  BBC Parliament

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