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Importance of International Trade to an Open Economy Such as the UK

Describe about the Fiscal Policy and the Current Account?

International trade plays a major role in the overall economic development of an open economy such as UK.  For example, international trade enhances the domestic competitiveness and maintains the cost competitiveness in open economy. In addition to this, it should also be noted down that, international trade also increase the sales, revenues and profits in the open economy by utilizing available resources effectively. At the same time, it can also be said that, international trade also helps an open economy in reducing the dependence on existing markets and stabilize seasonal market fluctuations. For example, international trade helped the UK in gaining a global market share in an effective and proper manner (Abbas, Bouhga-Hagbe, Fatás, Mauro, & Velloso, 2011).. 

Comparative Advantage is more significant and valuable because it helps the business firms and organizations in improving or enhancing their abilities to produce products or services at the lowest opportunity cost. In addition to this, it is found that, comparative advantages also provide significant opportunities to the nations or companies to investment in research & development which can drive innovation and invention. Moreover, comparative advantage also encourages trade development in the nations or countries. Hence, it can be said that, having comparative advantage in the current time is essential not only for the organizations but also nations for the economic and financial growth (Blanchard & Milesi-Ferretti, 2012).

Absolute advantages means an economy can produce an innovative and effective product at the lower cost as compare to the other nations or countries. Hence, it can be said that, it is an ability of a business firm or a nation to provide and produce goods and services at the lowest price as compare to competitors by using same amount of resources. In addition to this, this also provides cost advantages or benefits to the nations or a company. Moreover, it also increases the scope of international trade in an economy effectively. For case, UK or USA can have absolute advantages over the India in producing and providing certain products or services (Baumol & Blinder, A. (2010).

Trade: It can be defined as the transfer of ownership of goods or services from one person or entity to another in exchange for other goods or services or for money. Simply, it can be said that, it is all about direct exchange of goods as well as services for other goods and services or price. It also exits due to specialization and division of labor, Absolute Advantage, or Comparative Advantage (Helpman, Itskhoki, & Redding, 2010).

Exchange Rates: In the economics and finance, an exchange rate is also known as foreign-exchange rate, forex rate, FX rate. So, it can be said that, exchange rate is the rate between two currencies which one currency is exchanged for another. In the same way, it is the evaluation or measurement or value of a currency as compare to other.

Balance of Payment can be characterized as an efficient record of a country's financial exchanges and records among a nation and the rest of the globe during a pre-determined time-period. Simply, it is the difference between all receipts from foreign countries and all payments to foreign countries. So, that it is a process of systematic recording of financial and economic transaction of a nation with others (Stroup, 2007). The main structure of the BOP is given below:

Significance of Comparative Advantage

Structure of the Balance Of Payments

The balance of payments records all economic transactions between resident and non-resident entities during a particular time period. The EU was established on 1 November 1993 with 12 member states that have 28 member states (EU-28) in the present time. The European Union (EU) can provide mutual help to non-euro area member States if a member State is faced difficulties or seriously threatened with difficulties as regards its balance of payments. The below chart indicates the data of the balance of payments for the European Union (EU) and its Member States (European Commission, 2015). The below chart indicates the due to the global financial crisis during 2007-08 the EU balance of payment is decline or negative (account shortage) and after 2012 the balance of payment is positive means account surplus.

In addition, the current account of the EU-28 was shown in the picture that was EUR 126.5 billion in 2014, representing to 0.9% of GDP (gross domestic product). In addition, in the past year (data for 2013), the current account surplus was EUR 155.5 billion that indicates the current year account surplus is decreased (European Commission, 2015). The decline current situation of account surplus and high up and down in the balance of the payment of EU indicates the risky situation of the international business. The fluctuation trend of the balance of payment of EU expresses the risky situation of the international business in the EU region.

Current Account Balance

(Source: European Commission, 2015)

The below picture indicates selected items of the financial account balance, 2014 (EUR billion) of the all 28 member states of the EU.

Financial Account Balance

(Source: European Commission, 2015)

The above data indicates there were 20 EU Member States that reported current account surplus in 2014, while 8 recorded deficits. The large surplus reported by the Netherlands (10.3 % of GDP), followed by Germany (7.6 % of GDP), Ireland and Denmark (both 6.2 % of GDP), while the largest deficits were in the United Kingdom (-5.5 % of GDP) and Cyprus (-5.1 % of GDP). In addition, Luxembourg (37.7 % of GDP), Malta (20.4 %), Croatia (16.8 %) and Cyprus (15.1 %) reported relatively large surpluses, while the Ireland, Germany, the Netherlands and Finland were the only EU Member States to report a current account deficit for services in 2014 (European Commission, 2015). At the same time, Ireland reported the largest surplus for goods relative to GDP (25.0 %) as well as total of 17 EU Member States reported a deficit for goods, while only four Member States that reported largest surpluses for services.

Surplus and ‘deficit:  A trade surplus can be characterized as a surplus in the balance of trade and happens when the estimation of a nation's fares surpasses that of its imports. Conversely, a trade deficit is also called a trade gap that happens when imports surpass trades.

Significance of Long-Term Deficits to Open Economies: Open economies, for example, UK with long term and large defect can draw in more financial specialists to purchase the bonds or put resources into the country. In Notwithstanding this, it can also expand the number of foreign investment in UK government bonds pushing up the exchange rate. Besides, it likewise assumes a noteworthy part in expanding the national sparing and subsequently upgrading the future national saving. Besides, it likewise expands the estimation of trade rates in the open economies adequately (Free, 2010).

Significance of Absolute Advantage

In the international trade, exchange rates play a lot of significant and more valuable roles. For case, exchange rates imply a nation expected to buy the measure of one unit of nation cash. Notwithstanding this, it is additionally found that; exchange rate plays a lot noteworthy part in the improvement and development in the worldwide exchange. For example, exchange rates assume a vital part in the economies in maintaining the balance of payment and balance of capital. Moreover, an exchange rate assumed an essential part in making an organization's fares or item less expensive than others. Then again, it is likewise examined that, exchange rate is also responsible to expanding the overall revenue or lessening the remote cost. In the same way, it can be said that, it assumed a noteworthy part in the general advancement of economies (Helpman, Itskhoki, & Redding, 2010).

The adaptation of a single European currency is important and beneficial in order to reduce a wide range of transactional costs and other costs effectively. For example, with a single currency, there is no more an expense included in evolving currencies. Notwithstanding this, it additionally assumed a noteworthy part in getting the advancement the business sector by advancing value straightforwardness in the business sector. Then again, it ought to likewise be noted down that, the fundamental preferences ascribed to the adjustment of single European money are: dispensing with conversion standard vulnerability. Change in swelling execution, low premium rates, advantages to the monetary division internal speculation (Baumol & Blinder, 2010).

The single European currency (Euro) is reduced the difficulty of the member state through the Commission and Member States is seeking medium-term financial assistance. The Member State is designed to achieve a sustainable balance of payments position through presents a draft adjustment programme in support of its application. The adjustment programme is discussed within the relevant EU bodies, so this program addresses difficulty itself to the Commission and Member States (European Central Bank, 2015). The single European currency (Euro) is seriously threatened with difficulties regarding its balance of payments. In addition, the Council takes a decision whether to grant mutual assistance to solve the difficulties as regards the member states balance of payments. In addition, European Central Bank also played major role in a settlement and invoicing currency in international trade in goods and services in EU countries.

Free trade is about opening markets and minimizing consumer prices. In contrast, protectionism is a significant policy of the nations that is used to protect home industries and business firms and their workers by providing subsidies for their production and imposing tariffs on competing foreign products. Additionally, free trade focuses on fostering economic growth by increasing trade for a nation. On the other hand, protectionism focuses on increase in the amount of imports. At the same time, it is also analyzed that, protectionism includes raising the price of imports via tariffs but free trade is about promoting international trade and business in the economy for the purpose of economic development and strong wealth of the nation (Stroup, 2007).

Trade and Exchange Rates

Tariffs: A tax imposed on imported goods and services. Tariffs are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers.

Quotas: It can be defined as a legal quantity restriction placed on a good imported that is imposed by the domestic government.

Geographic Mobility: It has critical ramifications on the economy of a specific nation. Case in point, it assumed a noteworthy part in decreasing the unemployment by using the assets. Also, it is additionally improve the supply of work and profitability in the country that is a key for the monetary improvement and riches creation procedure of a country. Henceforth, it likewise diminishes the expenses inside of the country and gives opportunities. In this way, it can be said that, it assumes a vital part in riches creation (Abbas, Bouhga-Hagbe, Fatás, Mauro,  & Velloso, 2011).

Occupational Mobility: It also plays the major role in the wealth creation by increasing the supply of labor in particular industries. Moreover, different sources of employment can also be generated with the help of this that is essential in wealth creation.

EU is also known as largest political and economic union with approximate 28 member states that is located in the Europe. Moreover, it is also interpreted that, this union operates by an effective system of intergovernmental negotiated and supranational independent institutions decisions by the member states. Furthermore, there are various players in this union, these are listed as below:

The Court of Justice of the European Union

European Commission

The European Parliament (Liebscher, 2005).

The Council of the European Union

The European Central Bank

The Court of Auditors

Moreover, the main role of Main EU Institutions in Determining and Legitimising Policy are discussed as below:

To access the foreign markets in determining the Legitimising Policy

To promote the concept of availability of goods or services at the cheaper price because of imports and increased competition (Schiek, 2012).

Promoting the concepts of greater specializations and more efficient use of economic resources

Promote a common understanding across member states about the barriers to integration

Encouragement of free Trade

There are various significant role played by the EU directives. For example, they play a major role in enforcing the free trade free movement and competition rules across the EU. In addition to this, they also established specific and effective common social policies, standards, rules and laws so that unemployment rate can be reduce in an effective and more significant manner. Apart from this, to provide guidelines and policies regarding the labor law, working conditions, and health and safety are also the major role played by EU directives. Hence, it can be said that, EU Directives are responsible for certain functions, and tasks within the EU (Zezza, 2012).

Structure and Purpose of ERDF: The purpose of the ERDF is to help reinforce economic and social cohesion by redressing regional imbalances. This is achieved by supporting the development and structural adjustment of regional economies, including the conversion of declining industrial regions. In addition to this, it also provides direct and indirect support the the members (Liebscher, 2005).  

Describe the Structure of the Balance Of Payments

Structure and Purpose of ESF: The main aim or purpose of this organization is to support employment in the member states of the European Union as well as promoting economic and social cohesion. In addition to this, it should also be noted down that, this is also responsible for the economic well being in the member counties and provides financial instruments to support the member’s nations in an effective and more significant manner (Tatzberger, 2008)..

In the global trade, EU is one of the largest and prime organization and player in the global trading scene. The EU has achieved a strong position by acting together with one voice on the global stage, rather than with 28 separate trade strategies. The EU is the world's largest trading block. The EU is the world’s largest trader of manufactured goods and services. The EU is the top trading partner for 80 countries. By comparison the US is the top trading partner for a little over 20 countries. The EU is the most open to developing countries (Stroup, 2007).

In the current time, there are several cultural, logistical and environmental factors or barriers that are affecting the growth and success of EU at the global level. For example, the differences in the cultural aspects and environmental due to different nations are affecting the operations of EU negatively. Moreover, religious, cross cultural communication and changes in the attitude and behavior of the member’s nations are also affecting the success of EU operations (Seiler, 2007).

European Regional Development Fund (ERDF) – regional and urban development

European Social Fund (ESF) – social inclusion and good governance

Cohesion Fund (CF) – economic convergence by less-developed regions

European Agricultural Fund for Rural Development (EAFRD) (Tatzberger, 2008).

European Maritime and Fisheries Fund (EMFF)

The list is given below:

Development and implementation of new polices and standards

Generating funding sources

Utilization of available Resources

Reduction in the operational and strategic costs


Abbas, S. A., Bouhga-Hagbe, J., Fatás, A., Mauro, P., & Velloso, R. C. (2011) Fiscal policy and the current account. IMF Economic Review, 59(4), pp. 603-629.

Baumol, W. & Blinder, A. (2010) Macroeconomics: Principles and Policy (11th ed.). USA: Cengage Learning.

Blanchard, O., & Milesi-Ferretti, G. M. (2012) (Why) Should Current Account Balances Be Reduced&quest. IMF Economic Review, 60(1), pp.139-150.

Free, R.C. (2010) 21st Century Economics: A Reference Handbook. USA: SAGE.

Helpman, E., Itskhoki, O., & Redding, S. (2010) Inequality and unemployment in a global economy. Econometrica, 78(4), pp. 1239-1283.

Liebscher, K. (2005) European Economic Integration and South-East Europe: Challenges and Prospects. UK: Edward Elgar Publishing.

McEachern, W.A. (2011) Macroeconomics: A Contemporary Introduction (9th ed.). USA: Cengage Learning.

Moomaw, R., Olson, K., McLean, W. & Applegate, M. (2009) Economics and Contemporary Issues (8th ed.). USA: Cengage Learning.

Poulter, S. (2015). Oftel may end BT monopoly. Available At:[Accessed on 06 Oct 2015].

Riley, G. (2012). Unit 2 Macro: The UK Balance of Payments in 2011. Available At: [Accessed on 06 Oct 2015].

Schiek, D. (2012) Economic and Social Integration: The Challenge for EU Constitutional Law. UK: Edward Elgar Publishing.

Seiler, W. (2007) Economic Integration in NAFTA and EU: A Comparative Analysis. Germany: GRIN Verlag.

Stroup, M. D. (2007) Economic freedom, democracy, and the quality of life. World Development, 35(1), pp. 52-66.

Tatzberger, G. (2008) A Global Economic Integration Zone in Central Europe?: Vienna-Bratislava-GyÅ‘r as a Laboratory for EU Territorial Cohesion Policy. USA: BoD – Books on Demand.

Taylor‐Gooby, P., & Stoker, G. (2011). The coalition programme: a new vision for Britain or politics as usual?. The Political Quarterly, 82(1), pp. 4-15.

Zezza, G. (2012). The impact of fiscal austerity in the Eurozone. Review of Keynesian Economics, (1), pp. 37-54.

European Commission. (2015). Balance of payment statistics. Available At: [Accessed on 06 Oct 2015].

European Central Bank. (2015). Balance of payments and international investment position. Available At: [Accessed on 06 Oct 2015].

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