UK's trade deficit

Exports and Imports

The demand for exports and imports is influenced by:

Price - changes in costs of production such as cheap wages or price of oil
Price - changes in exchange rates - SPICED - strong pound imports cheaper exports dearer
Income - growth or recession in UK have an impact on what we spend on imports and likewise growth or recession in foreign markets will change demand for UK exports (especially luxury products that have a high income elasticity of demand)
Quality - improvements in UK design, engineering and high technology have made our gods and services more attractive worldwide.

The size of the UK's trade deficit is very volatile.

In 2015 it hit a record 6% of GDP compared to the usual large and persistent 2-3%.


Reasons why:

1. the pound may rise against the euro making the price of our exports less competitive so hitting UK export earnings and making imports more attractive - assuming demand for both is price elastic

2. World recession may also mean less is spent on UK luxury exports e.g Jaguar exports to the BRICS

3. UK economy may continue to grow resulting in the purchase of more imported clothing and electronic products so overall expenditure on imports rises.

However

Less being spent on imports
1. falling oil prices mean we are spending less on oil related imports which are price inelastic
2. deflation in the Eurozone so may be faced with spending less on imported euro goods, assuming demand is price inelastic
3. The UK economy may slow down resulting in lower spending by UK households and firms on imports

EXAM TIPS:
Please note as an exam an important assumption to be made is the Price Elasticity of Demand for exports and imports.



Look at the direction of change when considering the impact on the UK economy e.g using AS/AD assess explain the likely impact on the UK of a widening trade deficit?

see link here for answer: https://www.youtube.com/watch?v=HMGMk-5RZcc&index=7&list=PLB19E61D93CD7E354

Some relevant articles:
http://www.economicshelp.org/blog/1310/economics/uk-trade-deficit/
http://www.bbc.co.uk/news/business-30411134
http://www.tradingeconomics.com/united-kingdom/balance-of-trade