A large UK boat company producing motor yachts costing up to pound 3.5 million h

Question

A large UK boat company producing motor yachts costing up to pound 3.5 million has a full order book for the next two years. Their yachts are exported around the world and are built to specific requirements regarding materials. Many materials are imported including marble from Italy and wood from Asia. Give an outline on how the company would be affected if the following were to happen; The Bank of England increased the bank rate from 0.5 percentage to 2 percentage (analyze this for both the company owing money and having money invested) There was a change of government in Italy and the incoming government has added a 5 percentage export tax to help with their balance of payments. The collective governments of Asia have decided to reduce the amount of forest clearance; this is so they can claim they are helping the environment.

Explanation / Answer

a. Bank rate is the interest rate that a central bank of a country lends to the commercial banks of the same country. Since, the bank rate, i.e. interest rate has been increased from 0.5% to 2%, the bank of England will charge more for business loans. In such case, the UK based boat company will be using more earnings to pay interest on the loans that they have taken. This will bring loss to the company affecting the growth of the company in a negative way.

Bank rate affects the exchange rate that increase in interest rate increments the price of motor yachts that are exported around the world. This decrements the demand for these yachts abroad.

b. Since, the government of Italy has added a 5% export tax, therefore, there is increase in import duties which causes increase in price of imported good, marble resulting from increase in export tax. This increases in the price of their domestic product, i.e. yatch, on the domestic market, eventually increasing producer surplus, however decreasing consumer surplus. Increase in price of yachts increments the level of output as well as employment.

Overall, increase in export tax of Italy causes negative trade effects for importing country, UK.

c. Since, collective government of Asia decides to reduce the level of forest clearance, therefore, the cost of wood as a good rises. As a result, the boat company in UK takes more earnings to purchase wood from Asia. This makes the growth of the company stagnant and eventually causes loss for the company.

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