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Balance ò Payment

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Q1: Balance of payment: When a country trade with another countries, there are records of all that transaction known as payment of balance, the benefit of having such a record is to know how much money is spent on import and export in goods and services. BOP consist in: 1- Capital account: monitoring of the short term and long term transaction among the UK and the whole world in (saving and investment) with a surplus of 100 million in 2012 and it contains: * Direct investment: when an invest take a place outside the country (abroad) the record of transfer of ownership it’s called a direct investment with amount of 48.3 billion in 2012. * Portfolio investment: it’s all the investing in shares and bonds, and all the interest a dividends received from it concern to be in/out flow to the country, which it increased to 118.8 in 2012. * Other investment: includes net government borrowing from foreigners, and short-term. * Official reserve: the government used of gold and currencies held by the bank 2- Current account: keeping a record of all transaction in goods and services in and out of UK called current account which it’s was a deficit with over 59.8 billion in 2012. Which includes: * Trade in goods: in the oil section for in 2012 UK has been a net exporter for it. However, UK always import goods then it export which made it a trade deficit of 12.56 (-) billion in 2012. * Trade in services: it’s what the country provide for their people such as insurance and finance, with an 8.709 billion in the financial division which makes it surplus (+) in 2012. * Investment income: it’s all the earning comes as interest earned by investing in other investment, profit earned by investing in a business, dividend earned from invest shares in a business, which it was deficit (-) 33.9 billion in 2012. * Transfer: it has two section the first is government transfers which it means the account any benefit payments and state pensions by the government. The other is transfer made by other sectors which it means, any transaction of assets by the citizen to forging bank account. 3- Financial account: it handle all reserve assets and flow of direct portfolio and investment and the international investment position with 7.785 million (+). 4- Net error and omission: it doesn’t have all the accurate figures to hand over with a surplus 9177 million in 2012. http://www.economicsonline.co.uk/Managing_the_economy/Balance_of_payments.html http://www.economicshelp.org/blog/5776/trade/uk-balance-of-payments/ http://www.ons.gov.uk/ons/rel/bop/united-kingdom-balance-of-payments/2013/rpt-part-2--capital-account--financial-account-and-international-investment-position.html?format=print Q2. UK trade over the last 30 years.
From 1980 till 1985 UK had a current account surplus in the trade in services and investment income sector reached to +2.3 billion in 1985 and the reason behind it was that the investment in other countries owns by UK were earning more money than foreign investment inside UK. However, in 1986 the UK current account had witness a deficit in transfer balance and in balance of goods with -9.6 billion pounds, the pattern were the same from 1987 till 1995 because the declining in goods and in transfer balance which led to force the current account to be deficit. However, in 1997 UK witness for the first time since 1984 a surplus with 6.5 billion pounds in their current account, but unfortunately due to declining in their trade and transfer balance the current account want back to be deficit till 2000. The reason for having a deficit in their account because foreigners have more assets in UK than UK have in other countries. In 2000 there was a decline in the line of exporting goods falling from 4.4% to 3.2% in 2007 and 2.8% n 2009 which recorded a deficit in the goods and services, and this deficit reached a peak of 45.90 billion in 2006. In 2008 a recession accord to UK economy, which it leads to a quickly reduce the deficit (-) 0.4 billion. Furthermore, there was a slight decreasing in 2009 with amount of (-) 5 billion. However, a sudden decrease happened in 2011 with (-) 12.8 billion. Moreover, in 2014 a huge decrease happened reached to (-) 27 billion.

http://www.economicsonline.co.uk/Global_economics/Balance_of_payments_problems_and_policies.html http://www.s-cool.co.uk/a-level/economics/the-balance-of-payments/revise-it/the-uk-balance-of-payments Q3.Exhchange rate is the value of one currency toward another. In case if the currency of pound for instant decrease (weaken), therefore, all their export of goods will become cheaper. On the other hand, if UK want to import from outside USA they have to pay more to import products and services. When the services and product of UK is cheaper than the United States, therefore, it will arm wrestle UK to increase export volume. Which will lead to have a surplus of international balance of payment. In return the other country which import goods from UK will focus on importing cheaper goods than exporting which will lead to a deficit to their international balance of payment. For example in 2011 the value of £1 = $1.65 which it means the value of pound decreased, which leads to import goods from UK really expansive and also traveling outside, with that the exporting was the best option for outside countries like US to buy a cheap goods from UK. http://edis.ifas.ufl.edu/fe546 http://tutor2u.net/economics/revision-notes/as-macro-exchange-rates.html

Q4. There are 2 types of exchange rate system: 1- Fixed Exchange system: when there is no diverge deference’s between two or more countries in their rates. Therefore, it has advantage such as will increase the confidence in investing and long term contracting, which will promote investment and international trade, also it can control their money by the Central bank to avoid inflation, moreover encouraging investment by having a fixed rate sellers will agree on a certain price will not change over a sudden effect of the currency. However, they have also disadvantage such as in case of currency falling the government have to raise the interest rates to increase the value of the currency to avoid inflation, when interest rates increases it will cause lower economic growth which will lead to unemployment and recession. Also, the ability to respond to temporary situation will be a small chance to devalue. 2- Flexible Exchange rate system: it’s when the value of a country currency comparing to another different depend on the exchange market of supply and demand. The advantage of such a type is that no need for the Central Bank to intervene to protect the gold parity, furthermore, no need to monitor the current account imbalance by the International Monetary fund. Having a floating exchange rate is removing any chance of having a crises from international relation. However, having a not stable changes in the value of currency in almost daily bases will lead to instability into the trade specially for sellers who sell abroad and how much their products worth, also is will lead to decrease in the chances of investing inside the county and outside.

http://www.bized.co.uk/virtual/bank/economics/markets/foreign/further2.htm http://www.economicshelp.org/macroeconomics/exchangerate/advantages-disadvantages-fixed/ http://www.dummies.com/how-to/content/advantages-and-disadvantages-of-floating-exchange-.html

Q5. The effect of the exchange rate system over the business and individuals:
The flexible exchange rates effects on: * Individuals: If the cost of imported products are less in case of a risen in the currency exchange more people are willing to travel and buy from the outside. However in case of decreasing of currency exchange rate less people want to buy or travel outside. Furthermore, with the floating exchange rate the value of the currency in case of changing from currency to another may be greater when it’s under the fixed exchange rate. In the end, the cause of a raise in currency exchange rate the whole benefit will go to import more than export. Furthermore, the primer products such as gas can increase in a really high cost. * Business: when the exchange rate decrease the business owners can import a lot of product and materials in a cheaper price. The declines in currency exchange rate will benefit the business buy exporting their products (sell them) and earn a huge profit from it. In the end, it will affect the long-term plans or investments by having no stability in the currency rate of exchange.
The Fixed exchange rates effects on: * Individuals: in have a stable fixed exchange rate sometimes the rates may rise to maintain it, in other cases making a price comparison will be easier to conduct. Therefore, the country employment will decrease which will lead the government to decline their exchange rate to provide employment for their people. * Business: their business opportunity to conduct will be grater. Some of business transaction will be reduce due the fixed exchange rate.

Reference: 1- Economic online, Balance of payment .Available from: >http://www.economicsonline.co.uk/Managing_the_economy/Balance_of_payments.html<.. [8 February 2015]. 2- Tejvan P. UK balance of payment, 2014. Available from: >http://www.economicshelp.org/blog/5776/trade/uk-balance-of-payments/ <. [2 February 2015]. 3- Edward A. Evans, Understanding Exchange Rates. Available from: >http://edis.ifas.ufl.edu/fe546<.[28 January 2015]. 4- Advantages and disadvantages of floating exchange rates. Available from: >http://www.bized.co.uk/virtual/bank/economics/markets/foreign/further2.htm<. [30 January 2015]. 5- Ayse Evrensel, Advantages and Disadvantages of Floating Exchange Rates. Available from: >http://www.dummies.com/how-to/content/advantages-and-disadvantages-of-floating-exchange-.html<. [30 January 2015].

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