Question

In 2001, the economy of the United Kingdom exported goods worth £192 billion and services worth another £77 billion. It imported goods worth £225 billion and services worth £66 billion. Receipts of income from abroad were £140 billion while income payments going abroad were £131 billion. Government transfers from the United Kingdom to the rest of the world were £23 billion, while various U.K government agencies received payments of £16 billion from the rest of the world.

A) Calculate the U.K. merchandise trade deficit for 2001.

B) Calculate the current account balance for 2001.

C) Explain how you decided whether payments on foreign investment and government transfers counted on the positive or the negative side of the current account balance for the United Kingdom in 2001.

Answer 1

A) Deficit 30 , B) Deficit 20 , C) Forex inflow is at positive side, forex outflow on negative side

Step-by-step explanation:

A) Merchandise deficit is the difference between value of exported visible goods & imported visible goods.

UK 2001 trade deficit = Goods export value - Goods import value

£192 - 225 = - 30

So, Trade Deficit = 30

B) Current account balance is the difference between : forex inflow by goods & services exports, unilateral transfers, factor incomes received and- forex outflow by goods & services imports, unilateral transfers, factor incomes paid.

Current account Balance = (Goods & services export value + Income & transfer payments from abroad) - (Goods & services import value + Income & transfer payments to abroad)

= (192 + 77 + 140 + 16) - (225 + 66 + 131 + 23)

-20 [Deficit]

C) An item causing foreign exchange inflow leads to positive side on current account balance (eg exports). An item causing foreign exchange outflow leads to negative side on current account balance (eg imports)