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Britain had a deficit in its trade in goods balance of £34bn in 2002 - Examine the likely causes of this deficit.

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Introduction

Daniel Colton Britain has had a consistently growing deficit in trade of goods since 1982. Before then, deficits only existed in times of economic strength that boosted the UK's marginal propensity to import. Since 1982, economic boom has only served to increase the deficit, which continued to exist even through the recession of 1990 to 1992. This �34bn deficit in 2002, as well as the deficits for years before, can be largely put down to trade in manufactured goods. Of this �34bn, �26bn is due to the net imports of finished manufactured goods. This loss in competitive advantage in these goods is shown by the fact manufactured goods has fallen as a percentage of the UK's total exports by 9.5% from 17% in 1960 to 7.5% in 1984. Manufactured goods are not the only sector to create the deficit; the second biggest deficit is created by �9bn net imports of tobacco, food and beverages. The deficit in 2002 was the greatest since 1991. There are several reasons of varying importance that could explain the reasons for this deficit. Firstly is the issue of low price competitiveness in the UK that will naturally lead to reduced demand abroad for UK goods. ...read more.

Middle

Nor has the strong pound reduced the exports of cars, which was valued at �16.3bn in 2002. Although it is possible to say that because of the other problems the exchange rate is irrelevant as the UK has little to offer anyway, it is also relevant because if the pound was weaker the UK would have a lower marginal propensity to import, which is as significant in creating the deficit as exports. Together they are reducing the exports minus imports component of aggregate demand. Firstly, there are many ways in which firms can boost their own individual competitiveness over seas. This will often mean the need to reduce the cost of each unit of output, so it is cheaper to buy abroad. The most obvious way to do this is for a firm to grow, and to take advantage of economies of scale. These only exist in the long run, where all factors of production are variable. They can exist in many different forms: Technical, marketing, transport, increased dimensions, managerial, risk bearing, location, principles of multiples and financial. These all reduce the unit cost of production in different ways, for example increased-dimensions does so as shown below in fig 21. ...read more.

Conclusion

However, although this will improve competitiveness in this particular area it will increase government spending, possibly resulting in a budget deficit and a growing public sector net cash requirement. The most likely method to boost competitiveness that the government would use is probably supply side policies. These include trade union reform, education, technological improvement or increasing the geographical mobility of both employees and employers. These policies shift the long run aggregate supply curve to the right, improving the efficiency and hence the competitiveness of the economy. However, there are problems with these long run policies, they take a very long time to work, and have a rather uncertain affect. In addition to this, they may well conflict with other government macroeconomic objectives, as they involve greater government expenditure, producing the problems mentioned above. They also may involve foregoing tax revenue, require the reduction of interest rates and interfere with other social objectives, all of which have significant impacts. Several of the above points are explained below in fig 2.3. In conclusion, both firms and governments can increase the competitiveness of UK goods abroad, and although the government has the ability to do more, it also has more conflicts of interest, whereas firms often have a good incentive to boost competitiveness as foreign consumers mean increased profits. ...read more.

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