1. OF

2. Who Is
This

3. Balance of Payments

4. How economies are connected
Globalisation means economies are very connected
Check your clothes label; where do they come from? Your iPad, iPhone?
Goods are produced all around the world and sold all around the world
Some components for the iPhone may come from Japan, be assembled in China and sold in Kingston
When you need support when your iPhone stops working, you may speak to someone in India
Parts of Airbus planes are produced all over Europe, and sold anywhere in the world
Firms and investors own assets (physical and monetary, eg shares) all around the world
Individuals may work in many countries. For example, there is free movements of labour within Europe
Governments measure this interconnectedness with the balance of payments

5. What is the balance of payments
The balance of payments is a record of all economic transactions between the residents of a country and the rest of the world
There are two main parts to the balance of payments
Overall, the balance of payments must, er, balance
This means all the deficits in any of the accounts will be balanced by surpluses in others
In Theme 2 we are only interested in the current account, in particular in the trade in goods and the trade in services.
Current account – the trade in goods and services account, plus the primary income account and secondary income account
Financial account and capital account – refers principally to net purchases of financial and other assets.
Look at next year

6. 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

7. 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

8. What do we export and import? And services?
£ billion, 2014
Exports
Imports
Trade balance
Food, beverages and tobacco
19.1
38.5
-19.4
Basic materials
7.0
11.8
-4.8
Total oil
32.7
43.0
-10.4
Total semi-manufactured goods
76.9
96.5
-19.6
Total manufactured goods
147.5
210.8
-63.3
Services
Transportation
26.6
18.7
7.3
Travel
28.3
38.4
-10.1
Financial services including insurance
69.3
11.4
58.0
Royalties and fees
10.9
5.9
5.0
Other business
57.1
35.5
21.6
Total
219.8
130.6
89.1
Other business includes law, management consulting, engineering, research and
development, advertising etc.

9. Exports and Imports as % GDP (2010)

10. Task
In small groups consider the effect on exports or imports on the factors listed below. Take 2 minutes to discuss and then feed back to the rest of the class
The questions you have been asked to consider are:
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 exports if Europe goes into recession
What happens to exports and imports if there is an increase in labour productivity in the UK

11. Factors affecting exports and imports
What happens to UK exports if the pound falls in value against other currencies
UK goods would become cheaper in overseas markets. Demand will rise, and so exports would rise – improving the current account
What happens to imports if the pound falls in value against other currencies
Imported products will be more expensive, so demand will fall and so (the volume of) imports will fall
What happens to imports if the government cuts income taxes
Disposable income rises so consumers spend more so demand will rise. Some of the increase in spending will be on imports, so imports will rise, worsening the current account

12. Factors affecting exports and imports
What happens to exports if Europe goes into recession
Well European economies are already weak. A further weakening would lower demand in Europe, meaning lower demand for UK exports, worsening the current account
What happens to exports and imports if there is an increase in labour productivity in the UK
This means UK goods and services are cheaper to produce, which should mean an increase in exports, and a switch to UK goods rather than imports
Note if other countries improve their competitiveness, then the reverse happens

13. Current Account Deficit
So why does the UK have a current account deficit?
Our export markets are weak because the world economy is weak?
Imports are growing because the UK economy is recovering
The pound has been too strong, and so exports are weak?
Perhaps, though some may think the Pound has been a bit weak
We have lost competitiveness – other countries have improved productivity faster than us, particularly in manufacturing
Clearly this has happened to come extent. However, we are clearly very competitive in services

14. Do countries need a Current Account Surplus?
Adding together all the current account balances of all countries, the answer must be:
Zero. One country’s exports are another country’s imports
So is it OK for a country to run a permanent current account deficit or surplus?
Not in the long run, particularly if the deficit/surplus is too large relative to the economy. Why?
A deficit means a country is spending more than it is producing. This must be financed by borrowing, or selling assets. Cannot be done forever!
Generally governments will aim for near balance on current account in the long run. Small deficits or surpluses are acceptable