International economics - Balance of Payments - Coursework Example

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The current balance of payment of United Kingdom is economic transactions noted between the domestic country that is United Kingdom and the rest of the world in a given period of time. It can be a quarter a year, half a year recording or a full year recording. The transactions…
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International economics - Balance of Payments
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Causes of Disequilibrium in Balance of Payment The current balance of payment of United Kingdom is economic transactions noted between the domestic country that is United Kingdom and the rest of the world in a given period of time. It can be a quarter a year, half a year recording or a full year recording. The transactions can occur between individuals, business and non business organisations and government institutions. Therefore the balance of payment takes in to account all the external non visible and visible trade transactions of United Kingdom during a given year (Park 2004, p. 31). It generally represents all of the country’s current supply and demand of the claims on its currency and of foreign claims on foreign currency. The transactions of imports and exports done by United Kingdom can be in terms goods, services, financial transfers and financial capital.
A current account deficit of balance of payment generally happens when the value imports is greater than the value of the country’s export.
According to park if the sovereign payments are greater than autonomous receipts, the balance of payment will at disequilibrium. A country like United Kingdom which is experiencing balance of payment deficits in its current will be required to make up an increasing financial debt so that it posses more foreign assets (Park 2004, p. 122). Basically there are three types of balance of payments deficits. They include visible trade deficit, basic deficit and current account deficit.
Causes of Disequilibrium in Current Account Deficit
There are four in which United Kingdom measures its current account deficit. They include the net current income for example income from overseas investment, the balance of trade in goods, transfer of payments for example payments made to European Union and lastly the balance of trade in goods. The other factors that causes imbalance in balance if payment apart from the fall of value in pound include,
Consumer Spending and Economic Growth
A decrease in the current account is caused by a period of consumption led economic increase or growth. If consumption and consumer spending is increased within the United Kingdom, it will lead automatically to an increased expenditure on imports (Park 2004, p. 31). Given in 2011 and 2010, the domestic economy was experiencing massive growth with an increased consumer spending and inflation. This caused to a large gap of deficit on the current account. Recently recession has led to a temporary improvement in the deficit after most consumer cut back on their spending. A nation with individuals and firms saving lowly with a high percentage of consumption will automatically also have a higher current account deficit hence causing disequilibrium of balance of payment.
The relative competitiveness of industrial production of United Kingdom will have an effect on the current account in the long run. Exports will reduce relatively compared to imports if the country becomes uncompetitive (Park 2004, p. 94). Many years ago, the United Kingdom did not have a huge current account deficit. Recently the deficit has increased because there is deficit in manufactured goods. This means that domestic industries have become less competitive. For instance it means that the country has been unable to compete with high productivity countries like Germany and low cost nations like China. Factors that determine relative competitiveness include standard and quality of infrastructure, production of labour and relative wages.
Park, CY 2004, Balance of payment theories. Manila, Asian development bank (ADB) Read More
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