Explain how the value of imports into the UK is likely to be affected by A fall in the value of British pound

UK imports and the recovery of the UK economy

The UK’s balance of trade in goods and services improved at the start of the 2008 – 2009 recession as the value of imports fell at a faster rate than exports. However, since the UK and global economies have started to recover, UK imports have grown at a faster rate than exports despite the large depreciation of the pound since the second quarter of 2007. The reduction in labour productivity during the recession also affected the competitiveness of home-produced goods.

Since the middle of 2009, imports have increased by 7%. The majority of the rise in imports since the mid-2009 relates to increased imports of raw materials, semi-manufactured goods and vehicles. As the economy recovers, the manufacturing and construction sector will buy more inputs from abroad and hence some increase in imports is inevitable. However, the forthcoming rise in taxation, needed to reduce the budget deficit, should help to lessen the growth in household spending on foreign goods.

The UK’s deficit on trade in goods widened to a record high in July after imports rose sharply and exports fell from the previous month. The trade deficit was £8.7bn, the biggest deficit since figures began in 1998. However, trade in services produced a surplus of £3.8bn. Nevertheless, the deficit on trade in goods and services widened to its highest value in almost five years. Imports increased by 3.1%, which was largely driven by an increase in imports of chemicals, pharmaceuticals, oil and semi-manufactures.

Although some of the deterioration reflects a sharp rise in imports, which is an indication of the strength of domestic demand, July’s dreadful trade figures cast doubt over the ability of external trade do drive the recovery in the UK economy. With cuts in public spending and higher taxes down the line, the government was hoping that the recovery would be secured by an injection of demand resulting from more exports and reduced spending on imports.

Source: Various news reports, October 2010


You are required to study the above case and answer the following questions. Use diagrams and examples, and information from your own independent research and the case study itself to illustrate and support your points and arguments.

i. Explain the term “recovery”. (5 marks)

ii. Explain how the value of imports into the UK is likely to be affected by

a. A fall in the value of British pound (10 marks)

b. A reduction in the UK labour productivity (10 marks)

iii. Identify and explain at least three possible benefits to the UK economy of a weak British pound. (12 marks)

iv. Examine the reasons behind the failure of depreciation of British pound to improve the UK balance of trade. (13 marks) (Consider the impact through both exports and imports)

v. Evaluate the impact of a rise in taxation and cuts in public spending on the UK trade deficit. (10 marks)

Guidance Notes:

– You must prepare your answers in a report format.

– Your report should be between 800 – 1000 words and must be word-processed (hand-written reports will not be accepted).

– Read the case study carefully and consider key information when completing your answers.

– You must complete extensive research on the UK economy related to the topics before writing your answers and preparing the final version of the report.