A2 Unit 4 group essay by Jean Bulyaba

Utkarsh

2015-12-04 19:48:32 UTC

Another policy that can be used to correct a trade deficit in the UK (£99.7bn)is contractionary monetary policy. The bank of England can raise interest rates. By doing so, this will increase interest payments UK homeowners, who are on variable rate mortgage, make as interest payments on these types of mortgages closely follows the Bank of England base rate (currently 0.5%). Therefore as interest rates rise the contribution homeowners make towards their mortgage rises. This therefore means they have less disposable income meaning their domestic consumption decreases and their marginal propensity to import would reduce.

A rise interest rates can also lead to an increase in "hot money" flows into the uk. The rising interest rates lead to foreign individuals and firm moving their money into British banks as they receive a higher return on their savings. This would lead to an increase in investment in the UK causing an increase in aggregate demand and could lead to a surplus in the financial account, helping to reduce the trade imbalance.

However raising interest rates in order to reduce demand can have adverse effects such as it can cause an appreciation in the exchange rate. This would lead to a loss in competitiveness of exports for the UK meaning we export less. Besides exports, it can increase the marginal propensity to import as the stronger interest rates would mean its cheaper to import than consume domestically produced goods Another problem is the changes in interest rates can take up to 2 years to take effect changes will not affect people on fixed rate mortgages.

2015-12-04 19:59:41 UTC

One measure to reduce the trade deficit for goods in UK could be reduced through supply side policies such as an increase in education and training. In 2015, the UK trade deficit was the 5.5% of GDP. This would lead to an increase in the quality and quantity of labour and as a result lead to an increase in productivity.This would lead to a fall in average costs for the firm and as a result the firm us able to lower its price in order to be more competitive in the global economy. As exports become more competitive, net exports will increase thus reducing the trade deficit.

To evaluate, supply side policies may not be implemented by the government as due to the fact that they are a long term solution to a trade deficit, the current political party may be reluctant to invest in a project which would not help them to remain elected in the short run. This is because investing in education is a government objective and investing in education would worsen the budget deficit currently at approximately 12bn and not show any improvements to the trade imbalance in the short run, making the politicians look incompetent to the general public and as a result worsening their electoral campaign.E

Veronica

2015-12-05 15:47:52 UTC

An additional policy that has been used in order to reduce the US' trade deficit was by increasing protectionist measures. This was achieved by introducing tariffs, which the US put in place on Chinese tyres in December 2010. As a result of this the price increased, from P1 to P2 as shown on the diagram. This meant that tyre imports from China were more expensive, making them less competitive and causing expenditure to switch from Chinese imports to US suppliers. This caused approximately 100,000 Chinese redundancies due to the fall in demand for Chinese exports, however the US only put in place the tariff as 14% of US workers in the industry lost their jobs. As the price of tyres increased, suppliers were attracted to supply more, causing output and GDP to increase. Also, the amount of imports have reduced from Q1-Q2 to Q4-Q3, thus reducing the trade imbalance.

However, this would not work for Germany and the U.K. For example, as the UK is part of the EU, which is a customs union they must adopt a common external tariff. This means that the UK would not be able to set their own protectionist measures due to their commitments of being a member of the EU. Furthermore, introducing protectionist measures could lead to retaliation from China causing a trade war. Also as the WTO seek to remove trade barriers and promote free trade, they may rule that the protectionists measures are not allowed. This was demonstrated when China arranged a meeting with the WTO to settle the dispute.

amee

2015-12-05 18:47:07 UTC

Revaluating Germany's currency could reduce the trade surplus of €22.9 billion as it is unsustainable.Germany can attempt to revalue their currency by allowing exchange rate adjustment. The current account surplus in Germany had caused other countries exports to be held back. German growth is coming from exports rather than consumer spending. Revaluating Germanys currency would mean German exports would become less competitive as exports become expensive and imports cheaper. Cheaper imports can promote Germanys domestic customers to import goods from foreign countries. Increasing consumer spending in Germany. revaluating german currency would reduce the trade surplus and stimulate consumption in Germany and lead to a fall in exports, thereby reducing the trade surplus.

Zainab

2015-12-05 19:23:53 UTC

Appreciation of the E may not be effective as German goods have high price Inelastic demand. This is because Germany mainly exportintermediate goods with strong brand loyalty. Car exports are €180 billion with 70% of market share of brands such as Volswagen, BMW and Audi. Thus rise in the price of German exports, due to appreciation in Euro, may not effect foreign firms purchasing these goods. Hence the trade surplus may not be reduced.

Daniel

2015-12-05 19:50:45 UTC

In summation,a number of different policies should be pursued to correct these trade imbalances in the short and long term ,however some are more effective than others.For the UK and the US it depends on domestic demand.For example if domestic demand is weak as ot was after the 20008 recession then using contractionary monetary policy would lower growth. Where as for germany it would depend on non price competition such as quality of the product. This means if german exports stay attractive then revaluating their currency may not reduce foreign demand. Therefore using a combination of policies is the most effective way of tackling trade imbalances.

Ankit🤓

ankit02 — 2015-12-07 00:05:42 UTC

However, it can be argued that devaluation of a currency may not improve the trade imbalance and could actually worsen it as the price of inelastic imports will increase such as oil, gas and coals. This will lead to an increase in the value of imports thus worsening the deficit. This can be shown by the pound sterlings depreciation of 16 percent against the euro and 24 percent against the dollar yet the deficit has remained much the same since 2008

http://www.ibtimes.co.uk/weak-pound-plus-unchanged-trade-deficit-equals-selective-uk-recovery-1436765 (source)

Kelvin

2015-12-07 08:25:30 UTC

Furthermore, contraction art monetary policy leads to a fall in disposable income due to higher mortgage and debt payments. This means that the deficit would be reduced at the expense of living standards. This is more likely to have a more detrimental effect on lower income households thus worsening inequities.

Kelvin

2015-12-07 08:36:24 UTC

Kelvin

2015-12-07 08:45:08 UTC

However, as implied by the J curve, it is a common occurrence that an economies trade deficit would, over a course of time, be expected to improve. Thus it is not expected to be persistent. Despite the trade deficit in the UK, it is expected that it will improve, especially since the UK financial sector is often seen as a safe haven from the aftyermath effects of the financial crisis.

Kelvin

2015-12-07 08:50:54 UTC

For example in 2010, the US put a tariff on Chinese imported tyres that were being "dumped" in the US. this lead to a loss of 100,000 Chinese jobs and $1bn to their industry. This is likely to lead to a fall in consumption in the domestic economy due a fall in disposable income; The fall in AD is also supplemented by a fall in demand for Chinese imports. Consequently price level in the Chinese economy will fall from p1 to p2, while output falls from y1 to y2; this means that global output will fall. China is a relatively large net contributer to the global economy thus a fall in demand from the US is likely to have a relatively little impact on their economy as a whole.

Pavan

2015-12-07 09:56:34 UTC

Trade imbalances can be reduced by automatic effects in an economy (partial auto correction). This is because is the deficit is caused by strong demand then this will correct when the business cycle turns and there is a slowdown in the economy. However this idea may not prove that consumers will look to spend less on imports as it depends more on the elasticity of demand for these goods and services.

Another factor which can be used are deflationary policies such as fiscal or monetary contraction to deliberately reduce consumer spending. This can include an increasing in taxation, raising interest rates and reducing the availability of credit. A result of this will be a fall in disposable income and therefore a fall in the marginal propensity to import.

However to evaluate this point it is very harmful to an economy to pursue such strategies. This is because as spending power falls living standards will also fall and can trigger demand deficient unemployment. Also deflationary policies are politically unpopular and therefore politicians are less likely to prioritize this method. Furthermore it is difficult to predict the precise effect in the fall on spending on imports.

Thanushan

thanushan351 — 2015-12-07 10:00:13 UTC

however the savings scheme will not be effective if interest rate are set low, as consumers have less incentive to save and will continue to increase their spending, which will lead to a increased trade deficit due to the high volume of consistent imports. for example countries in the european union have to follow interets rates set by ECB therefore face problems when trying to reduce their trade defcit levels.

Kelvin

2015-12-08 14:06:39 UTC

Trade imbalance refers to a situation in which there are imports and exports are not equal leading to either a trade deficit or surplus. There are numerous effective measures that can be employed to aid the reduction of a trade deficit; these involve the use of: devaluation, contractionary monetary policy, protectionism and the use of supply side policies such as investment

Ricky

2015-12-08 14:13:50 UTC

Another factor that could reduce the trade surplus in Germany could be to implement supply side Policies aimed at reducing a financial account deficit. When a country has a current account surplus, it will run a financial account deficit in order to balance the balance of payments. Public investment is Germany is approximately 2% as a percentage of GDP. By investing in schemes such as house building programmes, FDI will increase as there is an increased demand for building firms. This is an example of a public-private partnership as the government delegates infrastructure projects to more efficient private sector to save costs. As is a greater chance firms can make a greater return on their investment, FDI will increase. This will be an inflow on the financial account and as the BOP must balance, this will automatically lead to a fall in the current account surplus Germany is experiencing

2015-12-09 23:29:07 UTC