Balance of payments is the account of the countries trading transactions with other countries.

It is composed of the Current Capital and Financial account. The balance of payments include trade in goods, trade in services, the net flow of investment income form UK overseas assets and the of money between people and governments. Demand side explanations y There are focused on AD factors. i.e. the cyclical causes of deficit there are mainly short term.

Sustained growth of AD leading to an increased demand for essential inputs. (e.g. steel, glass, rubber, plastics) Strong growth of consumer spending (UK consumers have a positive preference for imports) y y Economy cannot satisfy total demand for consumers Imports come in to meet the excess demand (thus acting as a safety valve)

The effects of the fairly strong exchange rate in recent years which has made imports quite cheap and out exports expensive in the world market leading to a slower growth of exports and faster growth of imports. Supply Side Explanations y These focus on LRAS they are seen as structural causes of a deficit i.e. mainly long term

Insufficient productive capacity from British suppliers linked to a relatively low rate of capital investment in the longer term. The productivity gap with businesses in exports sectors Inadequate non-price competitiveness A research and development gap The UK has a smaller share of global patents than comparable countries Changing comparative advantage in the global economy emergence of new lower cost competition in the UK y y China, India and other far east countries Eastern European countries also expanding rapidly

Economic Effects of a Fall in Exports Possible effects of a fall in demand for exports in overseas markets Negative impacts on aggregate demand y C+I+G+(X-M) y Fall in national output multiplier effect on incomes and spending y Might trigger an economic slowdown/recession y Actual GDP will fall below potential GDP growth Negative effects on company profits and business confidence y y Less demand implies less capital investment Can lead to plat closures / job losses/ cyclical unemployment

Government finances will be affected y Slower growth hits tax revenues + extra welfare spending

Some regions are more dependent on exports than others (e.g. manufacturing industry) might worsen the north-south divide