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Word Count: 661
In 1994 the UK had a Balance of Payments current account deficit Explain the possible effects that this deficit might have upon the economyDiscuss what if anything the UK Government could have done to reduce or eliminate this current account deficitThe balance of payments is a record of one countrys trade dealings with the rest of the world Any transaction involving UK and foreign citizens is calculated in sterling UK pounds Dealings which result in money entering the country are credit plus items while transactions which lead to money leaving the country are debit minus items The balance of payments can be split up into two sections 1 the current account which deal with international trade in goods and services 2 transactions in assets and liabilities which deals with overseas flows of money from international investments and loans The current account consists of international dealings in goods visible trade and services invisible trade Invisible trade includes payments for overseas embassies and military bases interest profit and dividends from overseas investment earnings from tourism and transportation The cause of a deficit was that the UK imported more visible goods than it exported and there was a net deficit on transfers our service earnings plus overseas incomes did not exceed our service payments plus investment income paid abroad sufficiently to prevent the balance on current account being well in deficitThe state of the trade balance is extremely important since changes in imports and exports have a important bearing on the real economy and in particular on output and employment In the longer run a persistent deficit if it cannot be offset by a surplus on invisibles will have serious implications It will handicap the conduct of the macroeconomic policy Its effect will be to increase instability of exchange rates andor interest rates as the UK becomes dependent on inflows of hot money to finance the deficit Higher interest rates are also likely to cause a reduction in
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