UK Trade Balance Analysis

The assignment provides an in-depth analysis of the United Kingdom's trade balance, with a focus on comparative advantage. It examines the theory behind comparative advantage, highlighting its implications for countries engaging in international trade. The report also delves into the specifics of UK's trade, including its participation in global trade, service trade balance, and export-import statistics. With reference to various sources such as the World Trade Organization (WTO), the UK Office for National Statistics (ONS), and the World Bank, this document offers a comprehensive understanding of the UK's trade dynamics and its adherence to free trade policies.

Running Head: COMPARATIVE ADVANTAGE
Comparative Advantage
Name of the Student
Name of the University
Author note

1COMPARATIVE ADVANTAGE
Table of Contents
Introduction......................................................................................................................................2
Background......................................................................................................................................2
Hypothesis.......................................................................................................................................3
Methods and data.............................................................................................................................3
Analysis...........................................................................................................................................4
Recent trade statistics of UK.......................................................................................................4
Trade Profile of UK.....................................................................................................................4
GDP and export.........................................................................................................................10
Comparison between goods and service trade...........................................................................11
Comparative advantage and Policy implication........................................................................13
Conclusion.....................................................................................................................................14
Reference list.................................................................................................................................15
Data Source...................................................................................................................................15

2COMPARATIVE ADVANTAGE
Introduction
David Ricardo proposed the theory of comparative advantage to address the problem
arose from the most fundamental trade theory of absolute cost advantage. The theory suggests
that one country enjoys a comparative advantage over other when it faces a comparatively lower
opportunity cost. It is then mutually beneficial for both countries to specialize in goods following
the principle of comparative advantage (Levchenko and Zhang 2016). The report focuses on
trade pattern of United Kingdom. It tries to investigate whether the trade pattern in UK follows
the theory of comparative advantage. In today’s world, countries engage in both visible and
invisible trade. The gain from trade depends on relative cost advantage and degree of
specialization. The paper is organized as follows- background or motivation, research
hypothesis, method and data, analysis and conclusion.
Background
Long since United Kingdom has been involved in international trade. Trade accounts
nearly half of the UK’s GDP. The external sector has accounted rapid growth in the last few
years. The main exported goods of UK include machinery, automobiles, transport equipment,
chemicals, electronic equipment and oil. One major area where UK enjoys a comparative
advantage is in different services (Meyer 2017). Of the services that UK exports financial
services constitute a lion share making positive contribution to the UK’s balance of trade. In fact,
the service sector has enjoyed a surplus in the BOP account as against deficit in goods trade. The
imported items of UK mainly include transport equipment, machines and food stuffs.

3COMPARATIVE ADVANTAGE
Hypothesis
After discussing the UK’s trade background and basic trade framework the following
hypotheses are framed.
Hypothesis 1
H01: There is no statistically significant relation exists between real GDP and export
HA1: A statistically significant relation exists between real GDP and export
Hypothesis 2
H01: The mean trade balance from good is not significantly different from mean trade balance
from services.
HA1: The mean trade balance from service is greater than the mean trade balance from services.
In addition to the two main hypothesis, the others areas of interest of the research paper
are whether any other trade pattern apart from comparative advantage exists in UK, major import
and export partners and the associated trade policies.
Methods and data
The first hypothesis is about testing whether a statistically significant relation exists
between net export and real GDP. In order to test this inference a regression analysis needs to be
conducted using data analysis tool in excel. The second hypothesis is about where the trade
balance from service sector is greater than that from goods sector. For this, independent two
sample t test is conducted using excel software (Chatterjee and Hadi 2015). To address other
areas of research graphs and charts are made in excel and the obtained results are evaluated in
context of UK economy.

4COMPARATIVE ADVANTAGE
Data
For the designed research quantitative data are collected from different official website
for the last sixteen years (2001- 2016). Data are collected on different indicators like real GDP,
export and import, trade balance and others. The entire research is based on quantitative data
analysis.
Analysis
Recent trade statistics of UK
Table 1: UK’s trade summary in 2016
2016 Export Import
value (in million $) 4,11,463 6,36,368
No of products 4501 4539
No of partners 230 226
The table above represents a brief summary of export and import volume of UK in 2016.
Export in UK worth nearly 4,11,463 million USD. The total number of exported items are 4501.
The worth of import during the same year was 6,36,368. The number of imported items exceed
that of imported items. This lead to a deficit in overall balance of trade.
Trade Profile of UK
UK participated in trade of both goods and services. The trade of goods refers to as
visible trade while trade of service is commonly known as invisible trade.

5COMPARATIVE ADVANTAGE
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Export and Import Volume (in billion)
Import Volume Export Volume
Year
Volume (in billion)
Figure 1: Export and Import volume of UK
The figure above shows that overtime UK has success increased proportion of export
volume as compared to import volume.
Top ten export of UK
2014 2015 2016
Commodity
V a lu e s in m illio n U S D
Figure 2: Values of top ten export in UK

6COMPARATIVE ADVANTAGE
As shown from the figure, the major categories of export are motor cars and auto parts,
gold, medicament, turbo jet, petroleum oil and other related product. Machine and transport
equipment constitute largest share of UK export with the share being 39.2%. The next two
important categories of export are manufactured items and chemicals with respective share being
14.0% and 16.6%.
United
States
34%
Germany
24%
France
15%
Netherland
s
14%
Ireland
13%
export partners of UK
Figure 3: Major export partners and their respective share
The major export markets of UK are in United States, Germany, France, Netherland and
Ireland. Among these countries, United State captures the highest share.

7COMPARATIVE ADVANTAGE
Top ten imports of UK
2014 2015 2016
Commodity
V a lu e s in m illio n U S D
Figure 4: Values of top ten imports of UK
The import pattern of UK reveals a surprising pattern. The imported items mainly have
the items that are exported. In the imported group, the higher weightage is on motorcars and auto
parts, Gold, Petroleum items, medicament, electrical and others. This kind of trade pattern is
known is intra-industry trade where country exchanges goods belong to similar industry
(Michaely and Wajnryt 2017). UK though have a comparative advantage in manufactured items
but still it imports manufactured and transport equipment of some other kind not produced within
the nation.

8COMPARATIVE ADVANTAGE
Germany
31%
China
21%
United
States
20%
Netherlan
ds
16%
France
12%
import partners of UK
Figure 5: Major import partners and their respective share
For imported items, UK mainly relies on Germany, China, United States, Netherland and
France. Germany has the highest share among all other partners.
Coming to the service sector, UK has a comparative advantage in financial service. A
strong financial service sector need high qualification of the labor force, strong capital base,
sufficient knowledge of English and efficient training and skill program (Corley 2017). UK has
all these characteristics and hence, enjoys a comparative advantage in financial services.

9COMPARATIVE ADVANTAGE
25.0%
27.0%
28.0%
6.8%
5.1%
8.1%
Service Export of UK
Travel & Transport
Business Services
Financial Services
Insurance
Royalties & lic fees
Remaining
Figure 6: Different service export of UK
In the service sector export, financial service constitutes the highest share. The other
exported service of UK includes business service, travel and transport, insurance, license fees
and others.
Australia Oceania and Polar Regions
Central and South America
Africa
Non-EU Europe
Asia
North America
EU
0 2000 4000 6000 8000 10000 12000 14000 16000
Service export
Q2 Q1
Figure 7: Export destination of UK services

10COMPARATIVE ADVANTAGE
There are two specific reasons behind UK’s comparative advantage over most of
developed nations. The first crucial fact is that UK focuses on a relatively small number of
subsectors as compared to highly industrialized nations focusing on different sub sectors. The
comparative advantage of Germany reveals that the nation enjoys a higher comparative
advantage in a comparatively large number of subsectors (Valero 2017). Similar is the case for
other contemporary economies such as France, Japan, Italy, Canada and USA. The greater
concentration on just few sectors brings greater efficiency.
GDP and export
In computation of GDP, exports earnings play an important role. The higher export
earning meaning a higher GDP and vice-versa. This economic intuition is examined by using
regression statistics. The regression result is given below
Table 2: Summary of Regression Result
Regression Statistics
Multiple R
0.80770152
7
R Square
0.65238175
6
Adjusted R
Square
0.62755188
2
Standard Error
1.55949E+1
1
Observations 16
ANOVA
df SS MS F Significance F
Regression 1 6.38985E+23 6.38985E+23 26.27406573 0.000154191
Residual
1
4 3.4048E+23 2.432E+22
Total
1
5 9.79465E+23

11COMPARATIVE ADVANTAGE
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept
1.33298E+1
2 2.16597E+11
6.15417749
7 2.501E-05
8.68424E+1
1
1.79753E+1
2
Export
2.86901982
2 0.559718817 5.12582342
0.00015419
1
1.66854235
4 4.06949729
The regression result shows an estimated value of multiple R square as 0.80. This mean
export can explain 80 percent variation in GDP. The co-efficient of export is 2.90. A positive
value of co-efficient implies a direct relation between GDP and export value. For 1 percent
change in the value of export, GDP changes by 2.9 percent. However, in order to validate this
result, the co-efficient should pass the test of statistical significance. The p value for the
estimated co-efficient is 0.0001. The probability value less than the significant value of 0.05
indicates the rejection of null hypothesis of no relation between GDP and export. Therefore,
export in UK is a statistically significant determinants of UK GDP. This validates the theory of
comparative advantage that countries are better off by involving in trade.

12COMPARATIVE ADVANTAGE
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
0
10
20
30
40
50
60
70
Trade as a percentage of GDP
Year
Percent
Figure 8: Percentage share of trade in UK’s GDP
Comparison between goods and service trade
As observed from basic trade framework of UK, the nation has a relatively higher
comparative advantage in service production. Therefore, as per Ricardo’s theory of comparative
advantage trade of service should give UK a greater benefit than trade of goods. This leads to the
second hypothesis of the research paper. A t test is performed to test equality of means between
goods and service trade balance. The t test result is summarized below
Table 3: Result of t test
t-Test: Two-Sample Assuming Unequal Variances
Goods Services
Mean -10.79736 7.4296
Variance 1.304501657 0.264554667
Observations 25 25
Hypothesized Mean Difference 0
df 33
t Stat -72.75535734
P(T<=t) one-tail 2.5647E-38

13COMPARATIVE ADVANTAGE
t Critical one-tail 1.692360309
P(T<=t) two-tail 5.1294E-38
t Critical two-tail 2.034515297
The p value of one tail t test is less than significance value of 0.05. This implies a
rejection of null hypothesis of equal mean between the two groups. The acceptance of alternative
hypothesis indicates the mean trade balance for service sector is significantly higher than that
from trade of goods.
2014 Jul
2014 Sep
2014 Nov
2015 Jan
2015 Mar
2015 May
2015 Jul
2015 Sep
2015 Nov
2016 Jan
2016 Mar
2016 May
2016 Jul
-15
-10
-5
0
5
10
Goods, Service and Total Trade Balance
Services balance
Goods balance
Total trade
Month
Trade Balance
Figure 9: Trade balance from goods and service sector
Comparative advantage and Policy implication
The theory of comparative advantage suggests countries always gain from engaging in
trade. Therefore, countries should support free trade policies. In UK, trade accounts for a
significant share in GDP. The findings give result consistent with the trade theory. Overtime, UK

14COMPARATIVE ADVANTAGE
has reduced the tariff rate as much possible and settle the tariff rate around 2 percent
(Eichengreen 2018).
2001200220032004200520062007200820092010201120122013201420152016
0
0.5
1
1.5
2
2.5
3
3.5
Rate of import tariff
Year
Rate of tariff
Figure 10: Overtime trend in import tariff
Conclusion
The paper discusses the comparative advantage theory with particular focus on UK
economy.UK ranks second in terms of participation in international trade. UK though engages in
trade of both goods and service, service trade appears to be more profitable. UK enjoyed a
surplus in service trade balance as against a deficit from trade of goods. United States, Germany,
China, France and Ireland are some of the major trading partners of UK. UK mainly export
manufactured goods, auto parts, transport equipment, gold and medicament. More or less similar
category of goods are imported as well. The service export of UK in include financial and
business service, transportation, insurance, loyalty and fees and other service. UK has always
given priority to free trade and reduces the trade barriers as low as possible.

15COMPARATIVE ADVANTAGE
Reference list
Chatterjee, S. and Hadi, A.S., 2015. Regression analysis by example. John Wiley & Sons.
Corley, T.A.B., 2017. The British pharmaceutical industry since 1851. In The Pharmaceutical
Industry (pp. 14-32). Routledge.
Eichengreen, B., 2018. Trade Policy and the Macroeconomy. IMF Economic Review, pp.1-20.
Levchenko, A.A. and Zhang, J., 2016. The evolution of comparative advantage: Measurement
and welfare implications. Journal of Monetary Economics, 78, pp.96-111.
Meyer, F.V., 2017. International trade policy (Vol. 14). Routledge.
Michaely, M. and Wajnryt, D., 2017. Intra-Industry, Intra-Product, and Inter-Product
Trade. Global Economy Journal, 17(3).
Valero, A., 2017. The UK's New Industrial Strategy (No. 038). Centre for Economic
Performance, LSE.
Data Source
Atlas.media.mit.edu. (2018). OEC - United Kingdom (GBR) Exports, Imports, and Trade
Partners. [online] Available at: https://atlas.media.mit.edu/en/profile/country/gbr/ [Accessed 31
Mar. 2018].
Data.worldbank.org. (2018). Tariff rate, applied, simple mean, all products (%) | Data. [online]
Available at: https://data.worldbank.org/indicator/TM.TAX.MRCH.SM.AR.ZS?locations=GB
[Accessed 31 Mar. 2018].

16COMPARATIVE ADVANTAGE
Michaelides, L. and Blake, C. (2018). Exports and imports statistics by country for UK trade in
services - Office for National Statistics. [online] Ons.gov.uk. Available at:
https://www.ons.gov.uk/businessindustryandtrade/internationaltrade/bulletins/
exportsandimportsstatisticsbycountryforuktradeinservices/quarter2aprtojun2017 [Accessed 31
Mar. 2018].
Stat.wto.org. (2018). Trade Profiles. [online] Available at:
http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Country=GB&Language=S
[Accessed 31 Mar. 2018].
Wits.worldbank.org. (2018). United Kingdom Trade Statistics | WITS. [online] Available at:
https://wits.worldbank.org/CountryProfile/en/GBR [Accessed 31 Mar. 2018].