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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.

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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.

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