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The Balance of Payments - Edexcel Economics Unit 4
The Balance of Payments - Edexcel Economics Unit 4
Balance of Payments
24/11/11
Starter Are the following statements true or false 1)The UK currently has a current account deficit 2)The UK currently has a financial account deficit 3)The UK is running a surplus in services 4) The balance of payments must in the long run always balance
Balance of Payments
Current Account
Financial Account
In the UK our current account is traditionally in deficit while our financial account is in surplus
Balance of Payments
Is used to balance to zero as inevitably due to the number of transactio ns this will not happen at a specific time
Financial Account
Supply-side policies
Supply side policies such as spending on education and training in order to improve the quality and therefore competitiveness of exports, aim to boost export demand rather than reduce imprt demand. Whilst they can incur an opportunity cost, they contribute positively to economic growth in the long run and can be antiinflationary in the long run
Video Intro
http://www.youtube.com/watch?v=JKRBpJ Z92QM http://www.youtube.com/watch?v=yCjwXz 7ZXwU Current account deficits and exchange rates
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http://tutor2u.com/ PPT can be found on the above web site.
http://www.tutor2u.net/economics/mindmaps/infl ation/LinkedDocuments%5CUK_Databank_Mast er.xls Click on the above link for economic data
Current account
There was a current account deficit of 20.0 billion in the third quarter, equivalent to -5.7 per cent of Gross Domestic Product (GDP), compared with 13.7 billion, equivalent to -4.0 per cent of GDP, in the previous quarter. The higher deficit was due to an increase in the deficits on trade in goods and on investment income.
Current Account
The deficit on trade in goods increased by 3.1billion to 22.6 billion. The higher goods deficit resulted from a rise in net imports of oil and semi and finished manufactured goods. Lower net earnings on foreign direct investment and higher net payments on other investment abroad led to a 3.6 billion increase in the income deficit. These effects were slightly offset by a small increase in the surplus trade in services while current transfers were virtually unchanged from the previous quarter.
Research
http://www.statistics.gov.uk/instantfigures. asp Use the above website in order to obtain data on the UK economy
Summary
A deficit on the current account of the BOP must always be balanced by a corresponding surplus on the financial account; A persistent deficit on current account means that in the long run domestic assets are being sold to overseas buyers, or that foreign exchange reserves are being run down. Neither situation can be sustained in the long run; A key cause of a deficit on the current account is the lack of competitiveness of domestic goods and services.
Balance of Payments
The Exchange Rate can affect the Balance of Payments. A stronger pound makes it harder to export goods, but easier to import goods. UK exports become more expensive abroad, resulting in fewer sales and smaller profits. This means there is more likely to be a balance of payments deficit. A weaker pound makes goods easier to export, but harder to import. Exports are cheaper, but imports become more expensive.This means there is more likely to be a balance of payments surplus. The European Union EU is one of the UKs most important trade areas.
Examination questions
1. During 2002 the UK economy experienced strong growth in retail sales, a decline in manufacturing output and a rapidly rising trade deficit. Examine the factors that might have led to these imbalances. (40 marks)
Essay Plan
What was the UK economy like in 2002? Consumer spending was rising fuelled by the housing boom. Inflation was on target, 2.5%. The pound appreciated in value and the manufacturing industry was in decline. Imports of finished manufactured goods were rapidly increasing whilst exports of finished manufactured goods were declining. The balance of trade in goods deficit significantly increased. Why was consumer spending rising rapidly? How can a rise in house prices boost wealth? Why did consumer credit increase and what effect did this have on imports? Why did low interest rates boost consumer spending?
Essay plan
Remember the economy was growing and unemployment was falling; what impact did this have on consumer spending? During this time period there were a number of goods falling in price like DVD players, games consoles, TVs etc due to supply side improvements such as technological innovations and improvements in productivity. Also, China and India low cost manufacturers. The high pound What impact did this have on imports? Conclusion have the above factors led to deindustrialisation? What impact will this have on the UK economy over time?
Plenary
Does a deficit on the current account really matter? http://www.economicshelp.org/2007/03/do es-current-account-deficit-matter.html