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Current account shows the differences between a country total export and total import of goods and services. The balance in the current account does not include transactions in the financial assets and liabilities. In terms of economics, the current account is the primary components of balance of payment and capital account. In other words, current account is the sum of the balance of trade, earnings from the foreign investment subtracted from payments made to foreign investors and cash transfer. (Krugman & Wells, 2009)
The current account balance measures the essence of a country foreign trade. If there is a surplus it resembles an increase in a country’s foreign assets, while if there is a deficit it shows the decrease in a country’s foreign assets.
The graph below shows the current account balances of the United Kingdom and the United States (The Economist, 2007)
From the graph above, it is evident that the United Kingdom has been having a small surplus in its current account. The deficit from the last six years is around 2.0-2.5% of gross domestic product. On the other hand, the United States’ deficit has grown annually to reach 6% in the year 2004 compared to 2% in the year 1997.
Although the United Kingdom is experiencing a deficit since 1998, its macroeconomics performance has been tremendously excellent. The conclusion that can be drawn from this observation is that a deficit in current account does mean that a country is performing poorly in general. Some countries have a surplus, yet they suffer from unemployment and have ineffective economic growth, an illustration to this is the case of Germany. Another country is Japan, which has enormous surplus account but has suffered severe economic downturns for the last twelve years. (Freeman, Shoulders, & Gregory, 2008)
Deficit in the current account must be investigated and its causes established, so as to know if the deficit will correct on its own eventually as the country goes through the normal cycle of economics. Also, it is needed to know if the deficit can be financed by attracting additional investment to increase the capital inflows. (Riahi-Belkaoui, 2005)
Current account deficit shows more about a country contemporary state; for instance, in the United Kingdom the deficit may have resulted from the manufacturing sector being unable to meet the demand for consumers’ goods and services. In order to meet the demands, consumers have to increase import from other countries. Also, it may prove that many imported goods and services are cheaper than the products manufactured in Britain, and also the decline of manufacturing limits the choice of products from domestic supplier for the consumer.
The deficits are resulting from strengthening of the British currency and improvement in the exchange rate that arises from appreciation of the value of the pound against the U.S dollar and also against the Japanese yen. The current account deficit is not exclusively the problem of the Great Britain, because other countries also experience the deficit. This is especially evident in countries that do trading with Britain, for example, the USA and European countries. As they undergo recession, this does affect the current account of Britain. (Bird, 2007)
Relationship between Balance of Trade and Currency Value
The balance of trade is the difference between the monetary value of goods and services exported and imported output of a country over a given period of time. Thus, balance of trade is the relationship between a country imports and exports. The balance of trade that a country has can either be negative or positive. Positive balance of trade shows that a country exports more goods and services than it imports. While a negative balance of trade is a deficit to a country and it shows that a country imports more compared to its exports (Fredric, John, & Agnes, 2010).
In an economic situation, the balance of trade is a component of the current account and it includes different transactions, such as income from international investment as well as aid that country gets. When there is a surplus in a country’s current account, the country net international assets position improves. On the other hand, a deficit decreases the country international asset position.
Currency value is a significant price in an open market or economy because it affects many business, investment and policy decisions made in a country. The elasticity model of the balance of trade shows that there is a theoretical relationship between the currency exchange rate and the balance of trade.
The currency value is measured by the use of the exchange rate of the country when importing and exporting the goods and services. Exchange rate provides relationship between the domestic prices and foreign prices for goods and services. When the exchange rate of a country is overvalued, it may bring a problem to a country, because it harms the exports and stimulates imports.
Large difference in the exchange rate brings a deficit in the balance of payment. When there is the undervaluing of exchange rate, exports will be stimulated while discouraging the imports of goods and services. From the above, we can note that the currency is in a direct relationship with the balance of payment. (Taylor & Weerapana, 2009)
The exchange rate is the price of unit of foreign currency in relations to national currency. The external value of a country’s currency is measured by the use of the exchange rate. Exchange rate shows a direct relationship between a country local goods and services prices and the price of imports. When the internal price is at level, overvaluing of the exchange rate will discourage exports thus, stimulating the imports of goods and services. This will bring about a deficit in the balance of payment. Likewise undervaluing of the exchange rate stimulates more export compared to imports, thus the surplus of balance of payment will occur in a country (Boggs, 2009).
In the graph below, supply and demand for foreign currencies in the market is shown by the X-axis at a particular period of time. The Y-axis shows the unit prices (exchange rates) representation in foreign currencies (Boggs, 2009).
Curve DD represents foreign exchange demand which leans down from the left to the right showing that when the price of foreign exchange is low the demand will be higher. Curve SS represents the foreign exchange supply and in moves upwards from the left side to the right side. It shows correlation of the higher the price, the lower the supply. The two curves will meet at point "a" at the rate 4, which indicates that the amount of supply in foreign currency is the same as demand and shows the market is stable (Arnold, 2005).
To correct deficit in the balance of payment, a country has to lower its currency value thus encouraging more exports than imports of goods and services. Thus, export will be on a higher level than imports creating a surplus in the balance of payment of a country.
The demand curve will move from DD to D`D` and meet the supply at point ‘b’ at the rate of 6. There is an increase of demand at a higher rate. The curve S`S` is the decrease in the rate of foreign exchange supply, which means that an exchange rate increases to point ‘c’. (Arnold, 2010)
Communication and Transportation within Britain
Transportation in the United Kingdom consists of the means of air, roads, water and rail. Approximation is that the road network in Britain totals to a sum of around twenty nine thousand, one hundred and forty five miles of main roads, two thousand one hundred and seventy three miles of motorways and two hundred and thirteen, seven hundred and fifty miles of paved roads. In Britain, the national railway network covers about 16,116 kilometers which is in use to carry around 18000 passengers and 1000 freight trains daily. The urban network of rails exists in London, Cardiff, Birmingham, Glasgow, and Liverpool (Williams, 2010).
The second world’s busiest airport Heathrow is in Britain, which serves the whole world. Also, Britain has a network of ports which received over 558 million tons during the year 2003-2004. The transport trend in Britain began many years ago, since the year 1952, which is exemplified by the growth of car use, increasing its model share while the use of buses in the country is declining, and railway growing slowly by slowly (Ling & Donner, 2009).
In Britain its communication industry mainly deals with the transmission of information all over the nation. This information includes advertising, broadcasting, newspapers and journalism within and outside the country. Most communication industries in the United Kingdom make satisfactory earning out of their businesses. There are a lot of highly rated international newspapers published in the country. Examples of leading newspapers include the Daily Star, Independent Newspaper, London Times and Financial Times among many others well-known newspapers in the world (Williams, 2010).
Telephone industry creates the most fundamental mode of communication in Britain. Telecommunications play a crucial role in the public and private sector. They provide internet services to the British people thus exposing them to the world. The primary function of communication in Britain is to provide information to the people; it acts as a community forum, brings the people of Britain together and connects Britain to the whole world.
The primary objectives of the United Kingdom communication is building and utilizing proper infrastructure, extending Britain communication industry, interacting with many channels of communication in the country and providing effective communication service to customers and citizen in Britain.
Country’s labor force consists of people who have attained the working age and are not yet retired. Labor force consists of participating workers who are people actively employed or seeking for a job. The labor force does not include students, retired people, parents who stay at home, prisoners, and people who are in employed but have unreported income, and finally people who have given up seeking for employment. (William, Jennings, & Roger, 2009)
The labor force consists of both the informal and formal labor. Formal or official labor implies that this type of employment is organized and paid in an official way. Formal labor in a country promotes growth of country’s gross national product (GNP). Informal labor is not structured in accordance to law and is not supervised by authorities. One can either receive the salary for unofficial labor or not because it is unregulated. In many countries, formal labor is reliable as compared to employment in the informal sector. Formal labor yields more income and has enormous benefits and security for individual working under this.
In the world, the contribution of informal employment is tremendous, Informal employment is increasing all over the world mostly in developing nations. From a study conducted in 2000 it is evident that informal labor constitutes 57% of employment not related to agriculture, 83% of the new workplaces in Latin America, and 40% of city employment. In most cases after a period of economic stagnation, the labor force tends to shift from the official sector to the unofficial one. This is evident in Asian countries during the economic crisis.
In the world gender is often connected with the informal labor. Research shows that women work more in the informal sector as compared to the formal sector. Informal labor is a large source of employment for women in comparison to men. This is equated through employment in the informal sector like home based workers and vendors in the street, majority of whom are women (William, Jennings, & Roger, 2009).
Formal and informal employment can be divided into agriculture based work and non-agriculture based work. The majority of the agriculture-related work is informal while the non agriculture work is formal. The majority of those who work in the agriculture sector employment employed more female while in the non –agriculture many employees are men.