The Balance of Payments - Data question.

Question 2

The constant balance of trade deficit in the UK will decreace the overall current account balance. The current account balance consists of both the balance of trade ( visible exports and imports) and the balance on invisible trade. The data informs us that there is fluctuation in both the invisible and visible balances.

For the current account balance to be positive and a surplus to exist the deficit must be less than the net investment income in the UK. The net investment income represents the trade on invisibles and other untangibles like services, payments ad receipts are included in this value. In 1986 the deficit is at a low of inder £1 billion yet net investment in at approximately £3 billion this creates a current account surplus of approximately £2 billion. From 1994 onwards the net investment is greater than £7billion and the record deficit only reaches £7 billion in 1999. The net investment is always greater in each year than the deficit creating a sustainesd surplus for the UK in current accounts deficit. This susutained surplus is good for the UK as it will have international debt however this could cause international problems as other countires must be in current accounte UK to stop importing. This period of surplus and economic growth followed a current account deficit and thus the UK could use this wealth to pay off any money borrowed to cover the deficit.

In 1985 and from 1987 to 1993 there appears to be a deficit in the current account as the net investment even becomes negative in 1990 and 1991. This deficit is sustained and could cause problems. This is because the deficit has to be funded. This could cause the UK to borrow capital or raise it through taxes perhaps. These forms of funding will affect the capital account and the circular flow of money. The sustained current account deficit could eventually cause problem in lending if borrowers do not think the UK can repay i.e. default on their loans. The deficit will slow our economic growth.

However it must be noted that the deficits are rather small figures in relation to national income , thus the deficit should not be a major problem for the British economy.

Question 3

The deterioration in the 'trade gap' in the late 1990s refers to a reduction in the current accounts deficit experienced in the early 1990s and the late 1980s. The sustained current account deficit was when exports were less than imports and problems as described in the extract were experienced. During this period of time although the deficit was not a very large in relation to national income therefore one year would not have been a problem. However it was sustained deficit therefore this would create a cumulative affect and a larger problem.

This problem would result in other countries gaining as the UK would be importing a lot and the wealth would go to other nations. The international wealth of the UK would be low due to the propensity to spend on foreign goods. This deficit would need to be financed by borrowing or taxes. Borrowing from other countries would result in high interest payments whilst taxes would be politically unpopular.

The deterioration in the trade gap means that the level of exports rises to meet imports. Economically this is good for the UK's economy. This means that although difficult the country would have to cut down on imports. This would reduce supply and drive up prices by an extension along the demand curve. Consumers would now spend their money on domestic goods as there would be less choice and less multinationals to compete with on economies of scale. This means less will be available to consumers and is likely to reduce their consumer surplus and their living standards although this is a minor negative point.

The reduction in the amount of exports will mean the expansion of national firms and this could create more jobs and help reduce unemployment and thus inflation. Our national economy would experience growth.The government will also be more capable of funding the past deficit if thet slowly come into a current account surplus. Inflation would cause the amount of deficit money to pay to slowly decline and this would be more affordable for the government. A reduction in deficit would free more government money for other economies.