1. Why would a country have a current account deficit or surplus?

2. Refresher Current Account Components

3. Current Account Net trade in goods (sometimes called visibles)
exports of goods minus imports of goods
Net trade in services (sometimes called invisibles)
exports of services minus imports of services
Primary income flows
From the net lending of factors of production overseas
Earnings being transferred to a workers home country (small for UK)
Net interest, profits and dividends from overseas assets
Secondary income flows
When the payment is not as a result of an economic transaction, so transfers
Mostly government transfers, such as our payments to the EU

4. The UK’s current account
£ billion
2013
2014
Trade in goods and services
Trade in goods
-115.2
-123.7
Trade in services
81.0
89.1
Total trade
-34.2
-34.5
Primary income
Compensation of employees
-0.3
-0.4
Investment income
-16.0
-32.0
Other primary income
-0.5
-0.7
Total primary income
-16.8
-33.1
Secondary income
General government
-22.7
-20.9
Other sectors
-4.1
-4.3
Total secondary income
-26.8
-25.2
Current balance (current account)
-77.9
-92.9
The current account deficit in 2014 was equivalent to 5.2% of GDP – too big

5. In groups of 3, consider the effect on UK exports or imports of the events listed below:
What happens to UK exports if the pound falls in value against other currencies?
What happens to imports if the pound falls in value against other currencies?
What happens to imports if the government cuts income taxes?
What happens to UK exports if Europe goes into recession?
What happens to exports and imports if there is an increase in labour productivity in the UK?

6. Causes of Current Account Deficit
High value of pound – UK goods uncompetitive
Cheap imports from low wage countries
Weak world / EU economy - ↓ demand for UK exports
High consumption in UK economy - ↑ imports to meet domestic demand
Poor quality, design, availability of UK goods

7. Costs of Current Account Deficit:
Unemployment in export sectors
Loss of confidence in UK economy – both abroad and at home – may ↓ investment
Fall in value of pound – decreased standard of living for UK citizens who buy imports; ↑ cost of production for imported raw materials
Possible benefits:
↑ standard of living from imported products
↓ pressure on inflation from cheaper imports

8. Is it better to have a current account surplus?

9. Policies To Reduce A Current Account Deficit:
Supply Side Policies: make UK goods more competitive at home & abroad so M & X (preferred)
Deflationary Demand-Side Policies: aimed at  demand for everything   demand for imports (not great)
Devaluation / Depreciation:  exch. rate → M & X (we don’t use this as a policy in the UK)

10. Homework: Essay! “Assess the extent to which the current account deficit in the UK is negative for the economy” Initial definition, 3 main points, 2 evaluations and a concluding paragraph (15 marks)..1.5/2 sides of A4