• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

The Balance of Payments.

Extracts from this document...

Introduction

The Balance of Payments The Balance of Payments is a record of the financial dealings over a period of time between the UK and the international economy. Essentially the accounts are divided into two sections with the current account measuring trade in goods and services and the capital account tracking flows of money associated with saving, investment, speculation and currency stabilization in and out of the UK. The Office for National Statistics divides the UK current account into four parts. 1. Trade in goods, ranging from raw materials to industrial products. 2. Trade in services, such as transport (e.g. shipping and air transport), travel and tourism, insurance and other financial services and royalties and license fees. 3. Income flows which relate to UK investments abroad and to foreign investments in the UK (investment income). These flows comprise a substantial proportion of the invisibles. 4. Current Transfers which relate mainly to the UK's membership of the European Union. The UK has to pay part of its tax revenues to the EU, however in return receives payments such as agricultural subsidies or regional grants. These four components of the Current Account are classified as either visibles or invisibles. ...read more.

Middle

In a consumer boom increased demand is likely to be reflected in the foreign market causing an acceleration in the volume of imports entering the country. The reason that UK residents are attracted to overseas goods is largely down to favourable international prices relative to UK firms and non price factors such as, quality, design, reliability, which are deemed better in certain International goods. One of the key factors in determining the price and volume of foreign imports and ultimately the current account balance is the level of the exchange rate. Presently high interest rates in the UK compared with other EU-countries has meant that foreign currencies have been attracted into London banks. The increased foreign currency reserves have inevitably pulled up the value of the sterling. Subsequently the pound is overvalued against the euro, meaning the overseas price of UK exports has risen, while the relative price of imports has fallen. This has considerably worsened the trade deficit with the EU, producing a record figure of 2.1 billion. This has been compounded by a strong appreciation of the pound against the dollar; in December 2003 the pound had risen to unprecedented levels of $1.7361. This rise in the value of sterling has led to a rise in the foreign price of UK exported goods and services. ...read more.

Conclusion

As a result the UK is set to lose out on trade with one of its main trading partners. Forecasts from the Office for National Statistics indicate that despite current government policy, current account deficit is likely to worsen. It is essential that the UK controls this before too much need is placed on foreign lenders. In the long term this can be achieved by creating a sufficient productive capacity for the domestic economy and through low sustained inflation. Ultimately this will mean that the British economy is able to meet the demand for goods and it is able to deliver a sustained growth of exports. Subsequently the emphasis must be placed on supply side polices aimed at shifting out the long run aggregate supply curve. This will improve efficiency in the export sector, provide increased research and development in domestically produced goods and allow a greater focus on resources in industries where the UK has a genuine comparative advantage resulting in an improved balance of payments. Ultimately this may not be an issue if the UK adopts the single currency. If it does the UK will forfeit its control over exchange rates and interest rates, and the balance of payments will cease to be a concern, because Britain's trade will be included with the rest of the Euro zone. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level UK, European & Global Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level UK, European & Global Economics essays

  1. Free essay

    Adam Smith "invisible hands"

    The downward pressure will exists on price (e.g. competition between entrepreneurs) which leads to decrease in price, higher quantity demanded and lower quantity supplied until it reaches new equilibrium E1. Thus, increase in supply steers to lower equilibrium price and higher quantity supplied. Surplus incentivises people to sell and buy (Figure 7).

  2. Where does the World Trade Organisation fit in the overall scheme of international public ...

    involve two or more countries getting together to regulate trade. Advocates argue small groups of like-minded countries should club together to take trade-and-investment liberalisation deeper, wider and faster than would be possible in the much larger and more diverse WTO.

  1. Globalisation of GAP

    Also no local knowledge will be needed because the business will not have to sell in the area. This can save millions in research and development for the company. Finally the risk of setting up in a foreign market is reduced and the business grows quickly and easily, a global brand is created.

  2. Free essay

    does uk housing market warrant government intervention

    A run through of the formula would indicate an outcome of close to 0. And due to the above determinants we can deduce that the supply curve for housing in North East will be inelastic, but less inelastic than that of the South East.

  1. Distribution of Income and Wealth HSC Notes

    Family Structure Family Structure Couple (no dependent children) Couple (dependent children) Single Parent Single Person All households Median income (/wk) $730 $690 $427 $528 $692 Median net Worth $442,000 $412,000 $72,000 $214,000 $340,000 * It is clear that there is a disparity according to family structure, with one person households,

  2. Carbon Credit Trading

    Members of the Exchange made a voluntary, but legally binding, commitment to the scheme and must meet yearly targets in reducing greenhouse gas emissions. The scheme works in the following way: A government agency sets a standard of emissions and divided this allowance in terms of carbon credits among all volunteer participants.

  1. Discuss the alternative policies agovernment may use to improve a deficit in the Balance ...

    A tariff is placed on the value of imports. This raises the value of imports as a result, domestic demand contracts and domestic supply expands. Home producers can supply more at a higher price, it gives them a competitive boost and the volume of imports reduced. The effects will be dependant on price elasticity of demand and the price elasticity of supply.

  2. International Trade - I have been asked to investigate the possibility of a company ...

    The strategy is also the final piece of the jigsaw as Lloyds would have already have their objectives set out their Pestle analysis done, their customers, resources and competitors also made aware of. The intermediaries will think of the four P's place, product, price and promotion.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work