1. Balance of payments

2. The current account Different from a personal current account and refers to trade in goods and services Is in 4 parts; trade in goods – (X – M) trade in services (X – M) investment income (X – M) current transfers (X – M)

3. Calculating BOP Exports £MImports £MBalance £M Trade in goods245,000322,000 Trade in services 125,00095,000 Investment income 240,000221,000 Transfers16,00028,000 Current a/c balance

4. Calculating BOP Exports £MImports £MBalance £M Trade in goods245,000322,000-77,000 Trade in services 125,00095,00030,000 Investment income 240,000221,00019,000 Transfers16,00028,000-12,000 Current a/c balance -40,000

5. Imports The purchase of goods and services by UK residents from abroad Imports represent a debit on the balance of payments account Imports may be purchased because: – They are better quality than those existing in the UK – They are not capable of being produced in the UK – The cost of production is lower than similar items produced in the UK – The service associated with such items may be better abroad than from UK producers

6. Exports Exports are the sale of goods and services by UK residents to foreign buyers Exports represent a credit on the balance of payments accounts The level of exports may be dependent on the competitiveness of UK producers in comparison to those abroad

7. Imports and exports and money flows Remember that each import and export involves money flows. An exporter to France will collect € then change this into £ when they bring the money back to the UK An importer will collect £ and change into their local currency when taking it back

8. Trade Trade not only occurs in goods and services but debits and credits are also recorded as a result of financial transactions, e.g. – Buying and selling of shares – Buying and selling of currencies – Buying and selling of bonds, financial derivatives, forward contracts, etc. – Movements of funds by governments and financial institutions – gold, Special Drawing Rights (SDRs), etc

9. Trade in goods Main categories of goods traded: Food, beverages and tobacco Oil Basic materials Coal, gas and electricity Semi-manufactured goods Finished manufactured goods

10. Competitiveness UK trading position heavily reliant on the changing nature of competitiveness across the globe: e.g the rise of countries like China and India – manufactured goods, call centres, etc. Has an impact on UK trade – what we trade, how much we trade and who with

11. Competitiveness Factors influencing international competitiveness important: – Level of domestic inflation in relation to our trading partners – Level of UK productivity in relation to trading partners – Level of investment in physical and human resources influences competitiveness – All affect the unit cost of production

12. Trade in services The UK’s biggest services are banking, insurance and tourism (Heathrow) Services are characteristic of a developed economy Some economists say a thriving manufacturing sector is still needed!

13. Change in employment

14. Investment Income Earnings from investments overseas minus income flowing abroad from foreign investments Bank loans and buying/selling shares are examples UK banks are big players in the international markets Toyota and Nissan have invested in the UK – profits from these plants will be exported

15. Transfers Measures transfers between countries; Money sent to families abroad (both ways) Government transfers; Grants/aid to foreign countries UK contributions to EU budget Contributions to IMF, World Bank, WTO Maintenance for troops, embassies and consulates abroad

16. Changes in the current account Value of the currency (ER) Changes in AD – increase tends to lead to more imports Inflation – higher inflation than competitors will result in less exports Labour productivity – lowers costs and makes goods more attractive for foreign buyers Innovation – lead to new products and hopefully more exports

17. Current account and AD/AS model P200 – copy 2 diagrams and make a note of the explanation!

18. Does it matter? A country CAN have a deficit if there is inward flows to finance it Can self correct if it is due to strong demand as the economic cycle will eventually reduce demand Imports can be capital equipment which is used to make exports….

19. However….. The deficit may indicate that the UK has lost competitiveness (low investment, productivity, comparative advantage) Continued M > X will eventually lead to reduced levels of output and employment Not easy to move from manufacturing to services from an employment POV

20. Which economy is performing the best?