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Introduction

Economic Assignment 4 You are to produce a report on the subject the balance of payments and exchange rates. In it you need to define what the various terms mean and examine critically their importance to the UK economy. You should concentrate on their role in how the economy performs how government policy is or should be affected by them and those trends that should be of concern to policy-makers. 26 April 2010 The balances of payments (BOP) and the exchange rate both plays a large role in the UK economy having a record of each year's financial transaction between the UK and the international economy that has trade with UK. The total cash flow is then split into 3 sections the current, capital and financial account, in "the current account measuring trade in goods and services and net investment incomes and transfers whilst the capital account tracks capital flows in and out of the UK". (http://tutor2u.net) Later in the essay I will show how exchange rate wills determine the amount of import and export in the country, and advantage and disadvantage of having a strong currency. There is also 3 main polices that will be affected by balance of payment, supply side polices which is the key polices its job is to try to push long term aggregate supply outwards, monetary policy reduce the aggregate demand ...read more.

Middle

goods which is mostly related to consumer product, balance of trade in services which is tourism and insurance, net income flows which is wages and local investment in the country. Financial account records transaction in the "financial investment, it takes account of total investment from aboard but for example if a UK firm brought a factory overseas it would be a withdrawal from the economy" (Sloman), the net financial flows which is the monetary flow the short term money that enter and leaves the country for example people exchanging currency, the capital account which is the "transfer of funds relates to fixed assets such as lands." (www.economicshelp.org) The government always try to make the balance of payment equal where the supply and demand of the currency will be equal, but in most cases there is usually either the current account will be on deficit and there will be a surplus on the financial account, vice versa. Changes in exchange rate can be a big effect on BOP with a time lag. If the UK pounds is strong "it will be hard to export good and cheaper to import goods and services" (http://tutor2u.net) with the same amount of sterling you could purchase more; this will then lead to a deficit in the economy. ...read more.

Conclusion

outwards, government will persuade businesses to put investment in "research and development, more effective marketing strategies can have powerful long term effects in winning and maintaining market share in highly competitive global markets." (http://tutor2u.net) Having more UK firms in export markets, increase investment in services industry for example tourism industry can earn a large amount of foreign currency in the same time expanding the local expenses, investing in new product development then exporting it aboard, all this will cause the LRAS to shift outwards increasing real national output but having the same price level shown in (appendix 2). The BOP works as the indicator of how the total amount of money that has enters or leaves the country in each year and the exchange rate can be seen as an instrument use to control the balance of payment by either increasing or decreasing import or export. In the UK BOP has been on deficit for almost 20 years now, and policies has always been affected by the BOP because in real life situation the BOP is never equilibrium therefore many polices is uses to act against the deficit. The monetary, fiscal and supply side policies are use mainly trying to adjust the aggregate supply and demand to achieve BOP equilibrium. Reference Sloman, John (2004). Economics. Penguin. pp. 516, 517, 555-559. Laurence Copeland. Exchange Rates and International Finance (4th ed.). Prentice Hall. pp. 10-35. http://tutor2u.net/economics/revision-notes/as-macro-balance-of-payments.html http://tutor2u.net/economics/content/topics/trade/boppol.htm http://www.economicshelp.org/macroeconomics/bop/index.html Appendix 1 2 ?? ?? ?? ?? Page | 1 ...read more.

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.