[Determinants of trade balance in UK]

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Acknowledgement

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ABSTRACT

The analysis of the relationship among prices, the trade balance, and exchange-rate systems most often relies on the so-called theory of purchasing-power parity. The comparative version of this theory stipulates that, in the final analysis, exchange-rate movements are mainly determined by differences in the movements of price levels in the relevant countries. If we designate the original exchange rate between countries A and B by the symbol ER sup A/B , then the value of the exchange rate in time t + 1 equals the product of the original exchange rate and the so-called price differential: From the mathematical expression of the comparative version of the purchasing-power-parity theory, it is clear that faster growth in country A's prices (relative to country B's) leads to depreciation of country A's currency. This is because the faster growth of country A's prices causes an increase in the prices of A's exports and a relative decrease in the prices of B's exports. The result should be increased imports by country A and a decrease in its exports. The resulting excess demand for foreign exchange should lead to a depreciation of country A's currency, until trade balance is reestablished. The analysis concludes that there are some fundamental similarities between the causes of each trade deficit, although there have also been large structural changes in the composition of UK exports and imports due to developments in the global economy.

Table of Contents

ABSTRACTIV

CHAPTER 1: INTRODUCTION1

Aim and Objectives of the Study2

Research Questions2

Research Hypotheses3

CHAPTER 2: LITERATURE REVIEW4

Balance of trade and payment4

Classifications Used in Balance of Payments Accounting5

Credits and Debits5

Autonomous and Accommodating Transactions6

Current Account and Capital Account Balances8

Measures of the Overall Balance of Payments: The Official Settlements Balance and Others9

“National Debt”?12

Debt Repudiation14

What Is a Budget “Deficit” and What Is Its Relation to the Debt?15

Measures of Selected Components of the Balance of Payments, 200716

Measuring the Merchandise Trade Balance17

Measuring the Balance on Goods and Services17

Current Account Balance and Capital Account Balance Measures18

Measuring the OSB19

Recent U.K. Balance of Payments History20

National Income Accounting and the Components of the Balance of Payments22

Balance of Payments and the Foreign Exchange Market24

Fixed Exchange Rates25

CHAPTER 3: METHODOLOGY27

CHAPTER 4: DISCUSSION AND ANALYSIS31

Econometric Estimation of the Model, Using UK Between 1990 and 1992 as an Example32

Trade Service in UK36

CHAPTER 5: CONCLUSION49

REFERENCES52

CHAPTER 1: INTRODUCTION

The UK economy has experienced a deficit (imports greater than exports) on the current account for 7 years or so, with the exception of the last quarter's data. There are 2 components to the current account: the domestic economy and the overseas sector. Analyses attempting to prove the general ...