Current Account Balance and Balance of Payments in the UK (2010-2016)

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Group Report
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Table of Contents
Introduction...........................................................................................................................................3
Part A....................................................................................................................................................4
Part B.....................................................................................................................................................9
Conclusion...........................................................................................................................................13
References...........................................................................................................................................14
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Introduction
The swings in current account balance incurred have negative impact and brings deficit in
the account balance. The report provides examples of nations like New Zealand, Japan,
United States for explaining the impact of current account balance overtime. Current account
balances swings due to changes in fiscal and monetary policy, fluctuation in exchange rates,
changes in inflation rates etc. The economy of the United Kingdom is matured economy. It is
the fifth largest economy according to the nominal GDP. The backbone of this country
economy is micro, small and medium enterprises. The main export partners of this country
are Switzerland, Germany and United States of America. On the other side the main import
partner of this country are Germany, China and United States of America. The situation for
swing in the current account balance of the United Kingdom is analysed in this assessment.
The reason for the same purpose is also determined in this assessment. After that there is
analysis of Balance of payments for the capital and current account in context of United
Kingdom economy.
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Part A
Role of Current account balance of country
Current account balance is an important terminology of any country’s macro economy. It is
one from the two primary component of Balance Of Payments of every country where it
records monetary transactions made with the rest of the world. Current Account Balance
includes transactions related to the import and export of goods and services with the rest of
the world. Import and Export activities of goods and services are fluctuating in nature and
due to change in these activities swings in current account balance will result. Current
account balance may goes into deficit or into surplus (The Federal Reserve Board, 2019).
Fiscal and monetary policies of the country are also responsible for current account
imbalances.
Surplus in current account balance is a good indication of country’s growth and development
and on the other hand, Deficit arises when country saves its money less then invest. United
states, Japan and New Zealand etc. are some of the nations which had faced current account
imbalances. Swings in current account balance arises due to change in economic policy
alignment made by the government of any country. The Swings in current account balance
can be determined through difference between investments and savings of a country and in
other countries. Current account balance deficit in the developed nation like united states had
long declined in savings, fluctuation in business cycle and bring large investment
opportunities in united states. Swings in current account balances had faced by countries in
early nineteen century.
Reasons of Swings in current account Balances
Generally swings or change in current account balances of the country results due several
factors such as overvaluation or undervaluation of exchange rate in the international currency
market, consumer spending level in the country, capital flows to the finance deficit,
fluctuation in import spending and inflation and competitiveness in the country etc
(Economics Help, 2019). current account generally measures balance in trade in goods or in
services, profit earning from overseas investments and transfer payments.
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Here is the explanation of the above mentioned factors of current account balances:
Consumer Import spending
In the tenure of consumer led economic growth lead to the deterioration in the country’s
current account, if the consumers spend more then it will decrease export and increase
imports. In the year 1980, the economy of United Kingdom had faced higher consumer
import spending that will led to deficit on the current account balance (Economics Help,
2019).
Change in Exchange rates of currency
When the depreciation in exchange rate arises then it will results swings in current account
balance and it will cause deficit in the economy. Depreciation in the value of currency will
led to expensive imports and competitiveness in exports of the country. In order to control the
swing in current account balance import and export must be price elastic.
Competitiveness/ productivity
Competitiveness in international market is one of the important factor which bring swings in
current account balances of the country. Less competitiveness will led decrease in exports in
comparison to imports of the goods. Wages, labour productivity investment in technology are
some of the wide reasons of less competitiveness of any country at international level.
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Capital Flows
Capital flows also impacts upon current account balance deficit. Less demand of currency
will save the money and reduce the size of current account deficit. For example the demand
of US dollar is quite high in the money market , if the country stop the capital flows of other
country’s currency then this will devalue the dollar and reduce the current account deficit.
Inflation Rate
Change in inflation rates or interest rates also brings the swing in current account balances
over time. Greater difference between country’s inflation rate as compares to the world’s
economy inflation rate impacts upon current account balance of the country. In the time
duration of 1994-1996 interest rates of New Zealand and interest rates of other economies
had widened to over 400 basis points. This was reflected higher credit demand in New
Zealand (AGARWAL, 2014).
Saving rates
Saving rates means investment income balances maintained by countries. In case of New
Zealand economy the investment income portion was 7% of GDP during 1997 as compared
to 5% during 1994 in the current account deficit. Such an increase will lead higher current
account balance deficit in the macro economy of the country.
Examples of swing in account balance
There are many examples available in the international economy related to swings in current
account balance. Economy of United States faces current account imbalances and on the
other hand Japan had experienced surplus in current account balances. Economy of New
Zealand also faces current account deficit during 1997. The deficit had reached 7.7 percent at
that time which was the highest one in comparison to the deficit in other countries.
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The table has been provided the data related to current account deficit in industrialised
nations and in east Asian countries. New Zealand and Thailand had recorded highest deficit
rate in the year 1997 and 1996. Level of industrialisation, stages of business cycle was the
major concern or reason of current account deficit for the economy of New Zealand, united
states and Japan. If business cycle is strong then this will lead strong income growth at home
and increase the demand of imports this will result current account deficit.
New Zealand government removes the capital control in the international market and the
economy becomes more persistent towards current account imbalances. The same experience
had been made by the economy of Canada and United Kingdom and they had faced account
deficit
The above discussion provides similar factors which were involved in bringing the
imbalances in current account of the countries i.e. New Zealand, United state, United
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Kingdom, Canada etc. the level of current account has influenced with the rate of growth in
the economy, higher the growth will led more savings and export as well. In order to put
control over the swings governments must maintain prudent and transparent monetary and
fiscal policies, focus on microeconomics of the country and balances the exports and imports,
government also works upon their regulatory systems in order to implement fiscal and
monetary policy effectively (Collins, et. al., 1998). There should be flexibility in the foreign
exchange market. Adopting these ways will controls the unnecessary swings in the country’s
current account balances.
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Part B
Balance of payment
Balance of Payments are recorded transaction which a country made with rest of the world’s
economy. Balance of payment includes capital account balance and current account balance.
Transactions includes in balance of Payments covers flow of goods and services (import and
export) and cross border payments related to financial assets and current asset. Balance of
Payments indicates the potentiality of a country to absorb financial asset and financial funds.
Macro economy suffers if the country fails in maintaining the balance between income and
expenditures at global level and balance of payment goes into deficit.
Not only foreign reserves are responsible but also money circulation within the country
influence the balance of payments. Balance of payments need to be prepared by each country
so that they can determine the importance and role of world’s economy along with their
economy. Economic transactions which are generally going to records in balance of
payments includes exports and imports of goods and services, capital account transfers and
financial account transfers (Rocha Gouvêa & Tadeu Lima, 2013). Balance of Payments have
categorised between capital account and current account balances. Capital account balances
covers income from foreign direct investments, and investments through bonds and shares
and stocks in the market. While, current account includes trade in goods, trade in services,
investment income and transfer of funds (Gov.uk, 2019).
Analysis of BOP of UK during 2010-2016 & Economic factors impact upon BOP
The record is the different transaction that is accomplished by the resident of a particular
country with the resident of rest of the world is known as Balance of payments. Balance of
payments is calculated for a particular time period.
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The Balance of payments for the United Kingdom can be understood with the help of
transaction under two accounts that is capital account and current account. The current
account for the balance of payment for any economy includes the analysis of current
transfers, transaction made for investment, services and goods. From the year 2010-2016
deficit is shown in the current account balance of payment for the United Kingdom. The
situation is not good for the United Kingdom in this particular period of time. The export is
more than the import was the situation in the United Kingdom economy. The import of goods
and services was the situation from the year 2010 to 2016 as compared to export. The data in
the year 2010 was below the x-axis or negative. The same trend is followed till the year 2016
(CEIC, 2019). The Balance of payments for the current account gets improvement in the data
of 2011. The export gets enhanced in this year. After the year of 2011 there is repeated
decrease in the export till 2013 and import was more than the export. After July 2013 the
situation get worse and export gets down as compared to the import.
Due to this situation slight economic growth in the economy of United Kingdom can be seen
but it cannot give fruitful result for the long term. In the long term analysis the country can
become a good consumer but not a good producer of the goods and services. It affects the
employment of the country (Thirlwall, 2012). The United Kingdom had taken Debt because
of this situation. Investment for the future purpose gets down because of this situation from
the year 2010 to 2016. The situation can be was enough like the country have to sell its
Assets and commodity for paying to the creditors.
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The income of the country does not affected because of capital account balance of payment.
The production of the United Kingdom does not affected because of deficit in balance of
payment in the capital account. The example of balance of payment for capital account is
cross-border insurance, international trade transaction, foreign investment etc. There is
always a deficit in the balance of payment for the capital account for United Kingdom from
the year 2010 to 2016. The situation is that there is money outbound from the United
Kingdom to the other countries. The government dealing gets affected because of this deficit
in the particular time period. Ownership in the foreign assets by the resident of United
Kingdom gets increased. This shows that local people are not investing in the United
Kingdom economy. The same investor invests in the United Kingdom then the economy will
get growth (CEIC, 2019).
Empirical theory result for change in bop and change in economic condition
There can be different economic factors that can be used for bringing the changes in the
balance of payment for the United Kingdom economy: -
 There can be improvement in the trade policies that can be bring by the United
Kingdom government for improving the balance of payment. Expenditure switching policies
can be introduced for the same purpose.
 Improvement in the macroeconomic stability will be beneficial.
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 Demand management can be improved by the government by less expenditure by in
the government oriented works (Johnson, 2013).
 The competitiveness can be improved by implementing the lower exchange rates by
the government of United Kingdom.
 Such type of policies can be promoted that can enhance the productivity of industry.
The promotion of innovation effective supply chain management industrial sector can be
accomplished for the improvement in the balance of payment for the country.
 Investment should be increased in the health and education sector. This will be helpful
in improving the condition of human capital that can take part in the competitiveness
(Johnson, 2013).
 The infrastructure of the United Kingdom can be made strong.
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