Russian Federation and United Kingdom: Comparison of Economy

Topics: Central bank, Investment, Macroeconomics Pages: 6 (1647 words) Published: April 23, 2014
CONTENT

INTRODUCTION
The report gives information about main macroeconomic models which were applied to Russian Federation and United Kingdom. It consists of three parts. First part is dedicated to the identification of macroeconomic models for Russia and UK. The second part is about main macroeconomic changes between 2005 and 2012 in Russia and UK. Finally, effects of increase in interest rate by Bank of England to Russia and UK were described in the third part of the report. Secondary online sources and macroeconomic books were used. SMALL AND LARGE OPEN ECONOMIES IN THE LONG RUN

If an economy can interact freely, by selling capital assets and goods and services in world financial and product markets, with other countries in the world, it is considered to be an open economy. In open economy net export or trade balance (NX=EX-IM) should not be equal to the output (Y) of goods and services: NX=Y- (C+I+G). It is equal to output minus the value of domestic spending. Positive NX means that the country can lend to foreign countries, while negative NX shows that the country borrowed from them. Besides, in open economy NX equals to the difference between Saving and Investment, as there is a close relationship between financial and goods market. Net capital outflow or net foreign investment is also equal to S-I. Therefore, we can say that Net Capital Outflow=Trade Balance. Positive NX means trade surplus when there is more export than import, in this case the country is net lender. Negative NX means the country is net borrower as there are more imports than exports and it is called trade deficit. NX will be zero when value of imports and exports is the same and it is called balanced trade. Moreover, real exchange rate is one of the most important factors that influences to NX. If real exchange rate depreciates, domestic products will be cheaper than imported goods and NX will be higher and vice versa, appreciation of exchange rate will decrease NX (Mankiw, 2003).

There are two types of open economies: small and large. Small open economy cannot influence significantly on world interest rate, world saving and investment as its share in world market is negligible. In this type of economy we assume perfect capital mobility which means population of the country can access freely to world financial markets without government intervention and capital flow should also be free as interest rates are the same in and out of the country. Interest rates of small open economy and world must be equal, as world interest rate defines small open economy’s interest rate. Large open economies can have an influence to financial markets of the world. Capital mobility is not perfect and interest rate of large open economies is not determined by financial markets of the world. In large open economies the sum of foreign and domestic investment demand is demand for loanable funds and it shows equilibrium interest rate (Mankiw, 2003). According to these theories and my own research, I assume that UK is small and Russia is a large open economy. First of the supporting idea is interest rate comparison of country with world interest rate.  

Interest rates

Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Federal Reserve
Reserve Bank of Australia
Reserve Bank of New Zealand
Swiss National Bank
Russia
UK
1.000 %
0.500 %
0.100 %
0.250 %
0.250 %
2.500 %
2.500 %
0.000 %
5.50%
0.50%

(Fxstree.com, 2013)
UK interest is 0.5% and most of the World Bank interest rates are also between 0% and 1%. But Russian interest rate is 5.50%. UK interest rate is close to the world interest rate and Russian is far from the interest rate. It can be an example for small open economy’s interest rate is determined by world rate, while large open economy can influence on world interest rate (Mankiw, 2003). UK

To define the type of UK economy I did some...

Bibliography: Economichelp.org, (n.d.). Effect of increasing interest rates [online]. Available from:
[Accessed 16 November 2013]
Fxstreet.com, (2013). World interest rates [online]. Available from: < http://www.fxstreet.com/economic-calendar/world-interest-rates/#> [Accessed 16 November 2013]
Globaledge.com, (2012). Russia: economy [online]. Available from: [Accessed 17 November 2013]
Mankiw, G., (2003). Macroeconomics. 5th ed. Worth Publishers: New York
Worldbank.org, (2013). World Development Indicators [online]. Available from: [Accessed 17 November 2013]
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