Introduction
International trade, which involves an exchange of goods and services across the geographical boundaries of a country, is one of the major determinants of the economic stability of a country. The volume of trade indicates the effect of trade on the economies of the participating countries. The economy of the United Kingdom has continuously experienced expansion despite the presence of rampant unemployment and inflation until the 2008 recession. This resulted from the failure of the government to take actions to correct economic instabilities (Washington et al. n.p).
The relative value of currency between countries involved in exchange is essential in determining how goods and services flow from one country another. Governments adopt fiscal policies to regulate both trade and value of their currency as a way of improving and maintaining economic stability.
A country may gain or lose in the trade with another depending on whether trade balances are favourable or unfavourable. When the balance of trade is unfavourable, a country suffers from the balance of trade deficits while favourable trade balances lead to a surplus. Unfavourable balance of trade usually results in economic recession while favourable trade balances lead to an economic boom. The relative prices of goods and services between the trading countries determine both exports and imports demand hence the balance of trade.
The net worth of international trade is an important determinant of the country’s GDP; it is the net value obtained from the difference between exports and imports values. The economy of the UK experienced improvement in trade balance between 2008 and 2009 where imports’ value fell faster than exports’ value (Sawyer 44).
Body
Recovery
In a narrow sense, recovery implies a return to the previous form; it entails renewal of systems, operations, processes, and policies by a unit in the economy or the entire economy. From an economic perspective, recovery is a process of revival by the economy after a period of economic depression. It entails the restoration of social, political, and economic systems of a country. Political disagreements among political leaders result in both economic and social recession because political leaders constitute the policy-making authority of a country. The manifestation of economic recovery is evident in the reformation and restart of economic activities, operations of institutions, and rapid utilization of resources.
a. British Pound and the Value of Imports
The relative value of currency between the trading countries determines the effect of trade in the countries. A deliberate reduction of the value of the local currency relative to the value of the currency of a trading partner entails deflation of currency by the monetary authority. Governments use deflation of currency as a strategy to encourage exports and discourage imports. Therefore, a fall in the value of British pound would result in a reduction of imports.
b. Labour Productivity and the Value of Imports
The productivity of labour determines the output regarding quality and volume (PGlover para 4). High labour productivity results in high output levels and high-quality output. When productivity is low, market demand for goods exceeds supply since the output level is low. Additionally, there is low demand for services due to low quality (Gregg and Wadsworth para 6). Thus, the demand for imports is higher than export demand hence the balance of trade deficits. Besides, deficient demand results in price inflation thereby reducing the competitive power of the local products. Therefore, a reduction in UK labour productivity would increase imports value.
A weak British Pound and its benefits on UK Economy
Currency depreciation has some beneficial impacts on an economy; a weak British pound would help the economy in some ways. To begin with, it discourages imports thereby increasing domestic consumption. Also, a weak currency increases local investment resulting in increased production. Besides, deflation of currency increases export value relative to import value leading to a surplus. Thus, weakening British pound would help in recovering from economic recession by rapidly growing export value.
Reasons for failure of depreciation of British Pound
Deflation of currency does not always produce the desired results. There are some instances where if fails to improve the balance of trade. The reason the British pound failed to improve trade balances is because of the need to maintain operations of some key industries whose inputs must be imported. For example, from the middle of the year 2009, imports increased by 7% (Engen and Skinner n.p). Most of these imports were needed to maintain some local industries such as manufacturing industries. Also, the UK does not produce everything that is required in the market. As such, some imports such as vehicles cannot be avoided.
Inducing exportations by depreciating the local currency result in overproduction and over-exportation where local industries only aim to make higher profits by exporting their products. Due to overexploitation, natural resources will finally get exhausted (Bell and Blanch flower para14). As a result, the domestic industries will either close down or import raw materials thereby moving the economy back to the recession.
Taxation and public spending
An increase in taxation normally results in expansion of the revenue base. Conversely, it reduces the disposable income leading to reduced consumers’ expenditure. Therefore, by increasing the tax, the government discourages consumption of foreign goods, which in turn reduce imports. Additionally, high taxation compels producers to sell their products in the world markets where prices are relatively high. Thus, tax rise has the tendency to raise export value hence improving the balance of trade. Reducing government spending would also have a significant effect on the UK’s balance of trade position. Reduction of government expenditure reduces the amount money circulation in the economy. Therefore, people are left with less money to spend on foreign goods resulting in a reduction of imports.
Conclusion
Recovering from economic recession is a process and therefore, cannot happen overnight. It entails renewal of practices, operations and activities that ceased to exist as a result of political instabilities or other exogenous factors. The balance of trade is a critical area that is essential for the economic stability of a country. Therefore, it should be analyzed carefully to prevent an occurrence of unfavourable outcomes. The government should adopt effective policies that will favour trade relations without producing cycles of recession.
Works Cited
Bell, David N F, and David G Blanchflower. “UK UNEMPLOYMENT IN THE GREAT RECESSION.” (2010): Web. 1 Apr. 2016
Engen, Eric, and Jonathan Skinner. “SYMPOSIUM: WHAT CAN TAX REFORM DELIVER? TAXATION AND ECONOMIC GROWTH.” (n.d.): Web. 1 Apr. 2016.
Gregg, Paul, and Jonathan Wadsworth. “The UK Labour Market and the 2008 - 2009 Recession.” (2012): Web. 1 Apr. 2016.
PGlover. “The Labour Market Story: The UK Following Recession.” (2014): Web. 1 Apr. 2016.
Sawyer, Malcolm C., ed. The UK Economy: A Manual of Applied Economics. 16th ed. Oxford: Oxford University Press, USA, 2005. Print.
Washington, Barry Cynamon Z, et al. After the Great Recession: The Struggle for Economic Recovery and Growth. Eds. Barry Z. Cynamon, Steven M. Fazzari, and Mark Setterfield. Cambridge: Cambridge University Press, 2012. Print.
