2 Aims and Objectives Aim: Understand the importance of current account changes.Objectives:Define current accountExplain why our trade balance is importantAnalyse changes in the current accountEvaluate if a deficit matters
3 Starter Define the current account. What is the current state of the UK current account?Where are the UK’s main export destinations?Where are the UK’s main import destinations?
4 Why is our trade balance important? Effect on the macroeconomyExports are an injection to circular flowMultiplier effect amplifies the effect of exportsEmploymentLevels of employment in the secondary sector rely on exportsRegional DisparitiesAreas such as the North and Midlands, rely heavily on manufacturing employment, a fall in exports would decrease employment and cause regional disparities
5 Current Account Changes Discuss in groups how each of the following can affect a country’s current account:Exchange RatesChanges in ADInflationLabour ProductivityInnovation
6 Exchange Rates Changes in AD Inflation Labour Productivity Innovation Prices of imports and exports affected, which affects consumer decisions.Changes in ADA rise in NI will result in increase in importsAn increase in NI with UK trading partners will result in increased UK export demandInflationIf inflation is rising faster than trading partners, exports will fall.More goods will therefore be imported as they are cheaper!Labour ProductivityMake a country more effective reducing prices of goods and services, increasing X.If trading partners more productive, then imports will rise.InnovationWill lead to new products, that will increase competitiveness of a country.
7 Current Account AD/AS Model PRICE LEVELCurrent account surplus: shift from AD – AD1Increase in real output and price level.If exports increase AD beyond AD2 this will be inflationary as economy pushed into a positive output gap.Increased exports benefit economy when negative output gap.But will add to inflationary pressure when in a positive output gap.ASAD2AD1P2ADP1PABCREAL GDP
8 Current Account AD/AS Model PRICE LEVELA deficit will have the reverse effect as AD will fall if demand for UK goods falls and demand for imports rises.This will contract the economy and reduce prices.ASAD2AD1P2ADP1PABCREAL GDP
9 Does a deficit balance matter? The UK economy has a large deficit balance, does this actually matter?
10 Argument ForDeficit may indicate that the UK has lost competitiveness due to insufficient investment.Continuous deficits leads to withdrawals from the circular flow that will reduce employment and NI.Loss of manufacturing jobs leads to structural unemployment.
11 Argument AgainstThere is no problem as long as there is sufficient foreign investment in the UK to finance it.Some of the deficit may be due to imports of new capital machinery that will increase productivity and potential growth.