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Measures to Reduce the Balance of Payments Deficit

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Explain what is meant by the term Balance of Payments Deficit on the Current Account and Explain the Measures that could be taken to Reduce this Deficit

The balance of payments records all financial tractions made with foreigners over a period time made between consumers, businesses and the government. The current account of the balance of payments compromises the balance of trade in goods and services plus net investment incomes from overseas assets and net transfers. In 2012, the UK’s current account balance of payments deficit was £59.8 billion.

The government is always attempting to introduce measures in order to reduce the balance of payments deficit in order to have a balance of payments surplus where exports are greater than imports.

One way the government could take measures in order to decrease the deficit is by lowing the exchange rate. A depreciation in the exchange rate of sterling could help to boost the overseas demand for UK exports because as a result goods from British would be cheaper and the UK export cheaply in international markets. Therefore, Exports would increase but also this would have an effect on imports for UK consumers. As the exchange rate lowers, imported goods are more expensive to UK consumers and goods become relatively more expensive - leading to a slowdown in imported goods. However, these consequences depend on the elasticity of demand.

Another way in order to reduce the balance of payments deficit is to focus more on longer term improvements in the trade performance of firms i.e. increase supply side policies such as productivity. Rising productivity implies that the economy is becoming more competitive as it utilising its workers and equipment efficiently and so will be able to produce goods at a lower cost than its competitors. If UK firms can produce goods at a lower cost, then this will make UK exports more

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