Trade – A2 Economics

Aims and Objectives

Aim: • Understand the UK current accountObjectives: • Define UK current account • Analyse the UK’s import and export

destinations • Evaluate the importance of the UK

current account

UK Current Account

• Measures the flow of income into and out of the economy. Four main parts:

1) Balance of trade in goods2) Balance of trade in services3) Income Balance – income earned on assets

overseas minus income earned from foreign owned assets in UK.

4) Net Transfers – foreign aid, transfer to EU budget

UK Current Account 2008£m

Export of goods 251,102

Import of goods 343,979

Export of services 170,399

Import of services 115,920

Balance of trade in goods and services -38,398

Income Balance 26,940

Net Transfers -13,610

Top 10 UK Export Destinations 2008

USA; 14.10%

Germany; 11.10%

Netherlands; 7.90%Ireland; 7.60%

France; 7.20%

Belgium/Luxembourg,

5.40%

Spain; 4.10%

Italy; 3.70%Sweden; 2.10% China; 2.00%

Top 10 UK Import Sources 2008

Germany; 12.90%

USA; 7.50%

Netherlands; 7.50%

China; 6.70%France; 6.70%

Norway; 6.30%

Belgium/ Lux-embourg; 5.00%

Italy; 4.10%

Ireland; 3.60%Spain; 3.10%

Top 10 UK Exports by Commodity 2008 (£m)

Oil

Road Vechiles

Pharmaceuticals

Power Generating Equipment

Misc. Manufactures

Industrial Machinery

Electrical Machinery

Transport Equipment

Organic Chemicals

Specialised Machinery

£0.00 £5,000.00 £10,000.00 £15,000.00 £20,000.00 £25,000.00 £30,000.00 £35,000.00

Top 10 UK Imports by Commodity 2008 (£m)

Oil

Road Vechiles

Misc. Manufactures

Telecomms Equipment

Office Machines

Electrical Machinery

Clothing

General Industry Machinery

Power Generating Equipment

Pharmaceuticals

£0.00 £5,000.00 £10,000.00 £15,000.00 £20,000.00 £25,000.00 £30,000.00 £35,000.00 £40,000.00

Trade in Goods and Services 2010

Current Account Balance 2010

Current Account Analysis – General Observations

• Fluctuations tend to be counter-cyclical, they follow opposite course of business cycle.

Because….• During a recovery demand for M will increase due

as domestic capacity is constrained, whilst domestic firms concentrate on booming home markets.

• Strong GDP growth between 1997-2007 accounted for deficit as UK consumers incomes grew, imported more.

• Opposite true in downturn.

1996-1998

• CAB improved

• Due to rapid growth of overseas markets such as the US which led to a surge in investment income in 1998 and exports of services.

1999-2003

• Investment income declined following Asian crisis and the rise in the value of the £.

• Between 2001-2003 global economic growth slowed and the value of £ remained strong.

• Current account remained in deficit, however narrowed due to income surplus.

2004-2006

• Balance worsened

• The increase in the value of £ against the $ was the main reason the deficit was so high

2007-2008

• Deficit narrowed by £6.1bn in 2007 and £12.6bn in 2008.

• Trade in services and income outweighed deficit in trade of goods.

Evaluation: Does the current account deficit matter?

• Read the Article.

• What does the current account deficit mean for the UK economy? Does it matter?

Plenary

• Discuss whether you feel trade with developing countries is necessary for the UK economy to grow.