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

Explain the various factors that would lead to an increase in the size of the Deficit on the Current Account of the Balance of Payments.

Extracts from this document...

Introduction

Explain the various factors that would lead to an increase in the size of the Deficit on the Current Account of the Balance of Payments The current Account is a key indictor for the British economy. It is the sum of four separate trade balances between the UK and the Rest of the World. The Current Account records the exports and imports of both visible invisible items. Therefore a deficit on the Current Account occurs when we was a country are either importing too many goods and services from abroad, or are not exporting enough, usually it is a mixture of both. UK consumers have a high income elasticity of demand therefore the demand for imported goods increases, also as people feel more wealthy they are more likely to spend on luxury goods such as holidays abroad. These holidays are also made to look more attractive with the advertising campaigns by companies. Companies that rely on imported raw materials and components in order to increase their productive output add to the size of the current account deficit. ...read more.

Middle

Exports can also be increased if our domestic industries increase their competitiveness in other ways. Higher productivity helps to reduce unit costs; greater investment in new capital and research and development can lead to a faster pace of innovation and the development of new products in export sectors. Non-price competitiveness can also be improved by better design, after sales service, guaranteed delivery dates and more effective marketing. The UK manufacturing industry has suffered over the years from low cost production in Less Economically developed countries, and so they UK has had a decline in comparative advantage in many areas as other countries have progressed an specialised in producing certain goods and services as technology has changed. Competition in the global market is starting to change and globalisation is starting to occur, this is when countries that were not big in the global market have started to open up e.g. China, Britain's comparative advantage has declined as other countries can produce the same goods at lower costs. ...read more.

Conclusion

Consumers cannot keep spending in excess of their income, and if the UK interest rates are increased then consumers are encouraged to save their money therefore less is being spent on imports. The UK is has proved to be a favored venue for overseas investment this is because Britain has one of the most open capital markets in the world. This investment helps to pay off the balance of payments deficit. If a country has open capital markets where money can flow into and out of an economy with ease, it should not be a problem to attract the capital inflows needed to finance a balance of payments deficit on the current account. However, in the long-term if imports are increasingly taking over from domestic producers, this threatens economic growth, employment and living standards in the deficit country. If the level of imported goods is sustained or continues to rise then UK companies are going to be unable to respond this will leads to companies going into decline thus for increasing unemployment. This will effect the economic growth of the country, as the economy will be less productive and efficient. Louise Carvey ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & 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 GCSE Economy & Economics essays

  1. The Social Balance - The Mixed Economy.

    In the last resort the Chancellor of the Exchequer can use the full weight of his office to secure reduction in estimates. However, there are reasons for believing that the methods of executive control of expenditure in the United Kingdom have developed a built-in bias towards expansion.

  2. Use the multiplier to explain how an increase in any component of aggregate demand ...

    be claimed by the government than on their previous earnings due to the progressive nature of taxation.

  1. How Can British Airways Increase Profitability?

    Both Easyjet and Ryanair have both quickly recovered at a similar rate, and now have a share price 20% higher than in March 2001. This contrasts heavily with British Airways whose share price has remained pretty static and not made a full recovery since September 11th.

  2. The Famous Grouse - company profile and exports

    The confirming/buying houses will take care of the export finance and any credit risks that may come from any buyers in the US market. They will also handle any of the documentation for transporting the goods, much like the export merchant, but will be paid on a commission basis from

  1. Britain had a deficit in its trade in goods balance of £34bn in 2002 ...

    Without a minimum wage the average cost of production is far reduced, meaning the goods are much more competitive on the international market. This loss in competitiveness is shown by fig 1.1 below, showing how confidence has been lost in UK manufacturing through dramatically reducing investment.

  2. Liberalization: where it has lead us and where it is headed

    What had changed in a matter of five years is that a whole new class of businesses had emerged who had a vested interest in keeping import duties low. From international lobbyists for the big multi-nationals to their domestic partners and agents - there was a chorus of voices in favor of cheap imports.

  1. The current and future prospects of Virgin

    In terms of the buyers or customers the bargaining power of buyers in the airline industry is quite low, this is affected by brand power, the relative volume of purchases, standardization of the product, and elasticity of demand (where demand increases as prices fall, and vice versa).

  2. What effects have interest rates had on economic indicators like GDP, Inflation ,Unemployment and ...

    Interest rates are increased to moderate aggregate demand and inflation, and reduced to stimulate aggregate demand and increase output. If rates are too low, then inflation may follow, and if they are set too high then it reduces aggregate demand too much which slows down inflation but reduces economic growth and employment.

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