Sample Essay

Employing the Gross Domestic Product (GDP) as a measure of output is due to many reason. These reasons vary in terms of the home country which is the United Kingdom and the bilateral trade partner. In this sense, the use of GDP gives the income of Britain, and most important is that it validates exchange rate model in the long-run of the monetary model of the country. In addition to that, employing GDP unveiling the countries income gives the macro effects and adjustments in their relationships like money-exchange rate, money-income and money-price (Collins 2004: 127).

These relationships take quite some time to materialize. Furthermore there is a change in GDP contribution in the UK which is from domestic production, oil production and investments in the commonwealth states. It is also important to mention that the nominal exchange rate is expressed in terms of UK sterling pound per other currencies in the money market. In which the short term interest rate for UK is represented by three-month Treasury Billy rate (Granger 2002: 205). In UK, there is a cointegration relationship between the real incomes, money supply and nominal exchange rates ((Hudson, Gregory 2003: 201)). This is usually when the estimated test statistics is above 5 percent of the critical value that is used in testing the zero cointegration existence. Possibly, there is no evidence of parameter instability in the case sterling pound exchange rates in relation to the other bilateral trading partner’s currencies.

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