§ Mr. Austin Mitchellasked the Chancellor of the Exchequer what assumptions his Department is making about the effect of a 1 per cent. reduction in the real exchange rate on the volume of imports and exports of manufactures in present circumstances.
§ Mr. LawsonThe long run competitiveness elasticity assumptions in use in the most recent version of the Treasury macroeconomic model are as follows:
Percentage change in volumes per 1 per cent. reduction in United Kingdom relative costs 1 per cent. reduction in United Kingdom relative prices Exports of manufactures +1 — Imports of manufactures -¼ -½ Estimates of the effect of a 1 per cent. reduction in the real exchange rate vary according to the precise definition of the real rate and the circumstances of its change.
§ Mr. Leightonasked the Chancellor of the Exchequer whether the United Kingdom's contribution to the EEC budget has had the effect of reducing the exchange rate; if so, by how much; what is his estimate of the effect of the reduction in the exchange rate on the total cost of imports in terms of sterling; and what effect this has had on the cost of living.
§ Mr. Lawson[pursuant to his reply, 15 November 1979]: Our net contribution to the EEC produces a debit on the current account of the balance of payments which, other things being equal, tends to exert downward pressure on sterling. However, it is impossible to distinguish the impact of our contribution from other factors which influence the exchange rate and hence it is not possible to calculate the second round 155W effects on import costs or on the rate of inflation.