Globalisation - How is the UK's international trade recorded

Question 1

What are the components of the current account(2)

Answer 1

Balance of trade in goods(visible)

Balance of trade in services(invisible)

Question 2

Calculate the balance of trade in goods, the balance of trade in services and the current account balance

Answer 2

Balance of trade in goods = export of goods - import of goods

Balance of trade in services = export of services - import of services

Current account balance = balance of trade in goods + balance of trade in services

Question 3

Explain what is meant by a current account deficit and surplus(2)

Answer 3

Current account deficit - value of imports exceeds the value of exports

Current account deficit - value of exports exceeds the value of imports

Question 4

What can cause a balance of payments(current account) deficit(3+2+2)

Answer 4

Overvalued Exchange Rate

• If the currency is overvalued, imports will be cheaper and therefore there will be a higher quantity of imports - causes deficit if demand is price elastic
• Exports will become uncompetitive as it is more expensive and there will be a fall in the quantity of exports - causes deficit if demand is price elastic

Economic Growth
-If there is an increase in income, people will have more disposable income to consume goods - If domestic producers cannot meet the domestic demand, consumers will have to imports goods from abroad.

Decline in Competitiveness.
-If there is high inflation or a decline in productivity there will be less demand for UK exports and British consumers will prefer buying imports

Question 5

How can the government reduce a balance of payments(current account) deficit(4+3+2)

Answer 5

Devaluation of the currency

• This involves lowering the value of the currency against others, making exports cheaper and imports more expensive.
• There should be a fall in demand for imports and a rise in demand for exports
• Therefore devaluation should lead to an improvement in the current account - however depends on the elasticity of demand for exports and imports.

Reduce Consumer Spending.

• Using monetary policy to increase interest rate - more expensive to borrow and better to save - consumer spending is likely to fall - This will lead to lower imports.
• However, lower spending may lead to lower economic growth

Supply Side Policies
-Supply side policies can improve the competitiveness of the economy and
exporters by improving productivity and lowering average costs - this can help increase demand for exports