General Trends and Composition of United Kingdom Balance of Payments

Economic Coursework
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Economic Coursework
UK Economy
General Trends and Composition of UK Balance of Payments
The balance of payments is mainly made up of the current and capital (financial) accounts and errors and omissions. The current account balance deficit has mainly increased downward trend up to 2008, then increased to in 2011, but from 2018 to 2020, the deficit had declined. The current account deficit is closely linked to a deficit in trade in goods. There have also been capital account deficits with the highest deficit levels in 2018 and 2020, but less than the current account deficit. Jayakumar (2017) reported that there had been a sharp rise in UK's current account deficit in the 21st century from £16.74 billion in 2005 to about £80.23 billion in 2015. However, there had been the current account improvement for the UK, and European countries combined were mainly due to austerity. The current account balances have also been affected by Brexit, and a slowdown in exports to the EU will make it harder to reduce the trade deficit. After Nasir & Simpson (2018), the Sterling pound depreciated during and after Brexit reaching £1=$1.21.
UK Trends in Trade
There has been a rise in the UK trade in services for the past 30 years, but there has been a deficit in the trade in goods over the same period, and the total balance of trade is negative. There has been growth in the service sector, while the share of trade in goods has declined gradually as manufacturing and production slowed down. The UK’s competitiveness has declined and manufactures shifted to lower cost jurisdictions. In 2016, 43% of the UK exports were to the EU, but with Brexit the trade deficit in goods and services (Elliott, 2018).
Exchange Rate and Balance of Payments
UK's balance of payments records the real and financial flows that the country exchanges with other countries. When there is the devaluation of the UK sterling pound and increased imports, there is a worsening balance of payments. The exchange rate affects exports and imports. The current account records our exports and imports of goods and services, income and expenses from factor income, and current transfers.
Exchange Rate: Advantages and Disadvantages
One of the main advantages of the fixed exchange rate is the stability in the currency's value, which limits volatility on the trade balance. It also promotes foreign investment in the country since the currency is less volatile. The fixed exchange system also helps contain inflation and supports exports. Among the disadvantages of a fixed exchange rate include the need to maintain constant reserves in foreign currency as capital reserves are required in foreign currency through international trade. There is also a limited capacity to react to crises and economic shocks.
Under the floating exchange rates, there is no need for international exchange rate management and frequent central bank intervention. There is also no need for complicated capital flow restrictions, and the macroeconomic factors affect the exchange rates. However, there are disadvantages such as high volatility in the exchange rate and increased exchange rate risk. The fl...