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Evaluate the View That an Increasing Deficit in Uk Trade in Goods Is a Major Problem for the Uk Economy.

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Evaluate the view that an increasing deficit in UK trade in goods is a major problem for the UK economy.

A trade deficit is a situation in which the amount of imports being purchased by the country is greater than the exports being produced

A fall in exports for the UK could have many effects on the UK. One of which is a negative impact on aggregate demand. Judging by the equation AD=C+I+G+X-M so if X decreases so will AD. There would be a fall in national output; this would create a multiplier effect on incomes and spending. Inturn this could cause a slow down in the economy or a recession. Also the actual GDP could fall below the potential GDP. This would happen because the AD would fall so companies start to lay people off so unemployment would rise. It would have a massive effect on businesses because it would hit their profits and therefore their business confidence.

Government finances would also be affected because if there is slower growth they would receive less money in tax revenues, they would also have to spend more on welfare benefits so national debt would be ever increasing. Finally some areas are more dependant on exports than others. For example the north is more dependant than the south so it could worsen the north south divide.

If there is less demand the incentives to investment in order to get ahead of competition isn’t as good so company wont invest in more capital or research and development. The lack of AD can lead to plant closures and job losses, therefore cyclical unemployment would become apparent. Buying more imports is also very damaging because this will also cause a reduction in AD within the UK economy. Having persistent trade deficits is generally very bad for any economy. The first reason would be structural weakness this may be a symptom of a wider economic problem e.g. a loss of competitiveness in overseas markets.

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