The Balance Of Payment's Control

Why has service income grown in the UK?

-Requires higher levels of skill+ expertise.
-MEDC's well educated-technical etc.

Can A Service Based Economy Flourish?

-It requires the UK to stay ahead. We have to be better educated, more competitive etc.
-There is severe competition that exists in services, and we cannot control it.

Investment Income:

Earnings from investments made overseas - payments made to foreign investors, who have invested in the UK.

-Dividends paid on shares.
-Interest/ yield paid on trends.
-Profit on overseas investments.
-Net positive for the UK due to legacy of overseas investments and new ones.

Types of Investment:

-Investments listed on a stock exchange.
-London is arguably the worlds most important.

Direct Investment:
-Plant
-Machinery
-Factories and Offices

FDI in UK:
-BMW- Rover- Mini
-Nissan- Sunderland
Tatar- Landrover

Transfers:
Transfer of money between countries
-Private Transfers- money sent home.

Government Transfers:
Overseas AID.
-Payments sent to Non Government Organisation's.
-EU, IMF, UN, WTO.
-Payments to troops abroad.

-Embassy Staff.

Private Transfers- Money in and Out.
Government Transfers generally just leave UK.

The Overall Balance Of Payments:

-Current Account (net trade etc).
-Financial/ capital account.
-Financial account is very large and it may offset the trade balance. Therefore a bad balance of trade may not be a negative to AD.

FDI is an inflow today and an outflow over time. Therefore over time the income account will go negative.

What Changes The Balance Of The Current Account?

-Changes in the value of the currency.
-Driven by a change in relative interest rates.
-Relatively low UK rates= relatively weak £
-A weak pound= cheaper UK exports= increase in Exports.
                         = more expensive imports= decrease in imports.
e.g the RMB (Chinese Rem-Nimbi) is too weak (fixed exchange rate)= Chinese exports are very competitive.

Inflation:
A relatively high inflation rate makes a country uncompetitive over time.

Productivity:
Increases in Labour Productivity improve UK competitiveness.

Aggregate Demand:
-The relative position of countries in the economic cycle.
-A country in a boom will import.
-Trading Partners (EU= 50% of trade= therefore important)

Innovation:
-New products create new demand
-I-pod, I-phone, I-pad etc.

The Importance Of Competitiveness:
-If we become uncompetitive, UK firms export less, go bust, close. Therefore exports decrease = vicious circle.
-We need to be competitive.

Investment is spending for the purpose of capital production.