'The trade deficit on goods in the first three months of the year was £7.1bn.' Explain the meaning of this statement.

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Bernice Berschader                                                        

‘The trade deficit on goods in the first three months of the year was £7.1bn.’

(a) Explain the meaning of this statement.

The above statements states that between  January and March 1999 the UK lost £7.1 billion on trade, as a result of a trade deficit or current account deficit on the Balance of Payments.

A Current Account deficit is where imports into a country exceed exports.  This leads to a disequilibrium of injections and withdrawals. Withdrawals from the circular flow of income exceed injections into the circular flow of income.  Though the current account consists of 4 elements,  visible goods, invisible services, net income and investment income, the statement above discusses the deficit of an element of the current account, the visible goods element  Even though a current account deficit results in the value of imported goods exceeds the value of exported goods, the demands for exports and imports will not be affected in the short run due to the Martial Lerner Conditions. Though eventually this will result in the foreign currency price of UK exports to decline, it will take some time for countries to react to these changes. In the short run the volume of exports will remain the same before it increases as a result of devaluation in the long run.  This is illustrated by the J-Curve effect below.

(b) Examine the possible causes of such a deficit.

There are a number of possible causes for a current account deficit. Because at a time when some countries will be running a current account deficit, in this case the UK for instance, other countries will be experiencing a current account surplus. Therefore it is essential to identify the underlying causes of a current account deficit before designing policies to correct the problem.

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High levels of economic growth could be a reason for the deficit. In a boom, when consumption and investment expenditure tend to rise, it is inevitable that some of this increased spending will leave the country as consumers and firms purchase imports. If one assumes ‘caterus paribus’ this will result in the current account balance deteriorating. The greater the marginal propensity to import will be, the greater the increase in imports.

A lack of productive capacity of domestic firms could lead to this disequilibrium. If domestic producers have insufficient capacity to meet rising demand from consumers, then imports of ...

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Although this essay is directed by the questions set, this would be a fine structure to follow for an essay. A strong definition of the key terms, then analysis of the mechanism in question and finally evaluation of the policy - this is a structure I would always recommend. The style here is strong, and makes for a convincing argument. Technical terms are used confidently, and spelling, punctuation and grammar are flawless.

The analysis here is strong. The definition of a current account deficit is great, with the varying types of trade being explained. The inclusion of the Marshall Lerner condition (not Martial Lerner) didn't seem relevant here, albeit a very strong piece of analysis. In my opinion this, along with the diagram, needs to be in the evaluative section when discussing policies. It is vital that you don't jump steps in an economics essay - throwing in analysis too early shows a poor structure and style. I was pleased to see awareness that if one economy is running a deficit, then another must be running a surplus. This shows understanding beyond the A-Level syllabus, as it shows awareness that other countries may be to blame (which some argue China's huge surpluses are to blame currently). Phrases such as "some economists believe" make the points strong, as there are a number of factors which contribute to current account deficits. Comparative advantage is an area I felt could've been elaborated upon, as this is a sophisticated concept. Expenditure switching, and expenditure reducing policies are fluently explained. I would've liked to have seen the J-curve here, as this would've supported this argument.

This essay responds to the questions superbly. There is sufficient knowledge shown throughout, and there are some perceptive debates in the evaluative section. Critical language such as "it is important to understand" shows awareness of the significance of factors affecting policies. Although this doesn't seem evaluative, where teachers define this as simply posing limitations or otherwise, it is in fact what the examiners are looking for. Such style allows for credit to be gained. I would've liked to have seen some discussion of "it depends upon" or "the extent relies greatly upon" as this would've prompted the essay to look further into different situations.