We’ve done this by passing the rise in both export and import prices through the UK’s input:output tables and used the same definition of tradables and non-tradables as before. 11  All speeches are available online at www.bankofengland.co.uk/speeches  11  higher output in the tradable sector. There is less room to raise output but more of an incentive to add to that capacity.   Third, and despite these incentives, growth of overall business investment in the UK was relatively weak last year. Early official estimates say it shrank slightly in the year to Q4, by around 1%. (This compares with positive growth of 2% or so in the Euro area.) And although those estimates are particularly prone to revision, the various survey indicators also subsided in 2016 (Chart 12). This last point is the critical one. The world economy is looking better than it has done for some time. Against this backdrop, and given the existing capacity constraints, the fall in sterling provides a powerful incentive to invest in the UK’s tradable sector. All else equal, it would make sense for existing exporters to expand; for domestic-facing firms to think about entering new markets; and for multinationals to shift production to the UK. Yet some caution would also be understandable. All else is not equal. While much is at stake, no-one can be sure about the eventual outcome of the Brexit negotiations.
10  In economics the impact on the exchange rate of variations in tradable versus non-tradable productivity is known as the “Balassa-Samuelson” effect (Samuelson (1964); for a survey of the evidence see Egert et al (2006)). 7  All speeches are available online at www.bankofengland.co.uk/speeches  7  I want to ask why this is. Why do forecasters think the more negative effects of sterling’s fall will predominate – what impediment might there be to its more positive effects? To do so it’s worth taking a closer look at how depreciations actually work. The view one often hears is that they make UK output cheaper in foreign currency terms, encouraging extra demand from overseas. I’m not sure that’s quite right. I said earlier that economists often make the approximation that prices of tradable goods and services are the same in all countries (measured in some common currency). This makes intuitive sense when you think of an area like commodities. For example, you would not expect sterling’s fall to reduce the dollar price of North Sea oil or the euro price of UK-produced wheat. Those are determined largely in global markets. What happens instead is that their prices go up in sterling terms. And if there is a response of net export volumes it comes about largely because the rise in prices directly boosts the profitability of UK-based production. Whether we’re talking about firms that export or those that compete with imports, it encourages such businesses to expand.