a) With reference to Figure 1, explain the term ‘net trade’. (4)
Net trade is the value of exports minus the value of imports. It is the difference
... [Show More] between the value
of goods and services sold to other countries and the value of goods and services bought from
other countries. From figure 1, the UK’s net trade is -2% of its AD. This means that the imports are
larger than exports and represents a decrease in the AD. Germany has the highest net trade in
proportion to AD, at 6% of its AD.
Teacher’s comments: 4/4
b) With reference to the information provided and your own knowledge, assess the likely
causes of the UK’s trade deficit. (10)
The UK has a trade deficit of -2% of AD. Firstly, one reason for this is low output in construction
and manufacturing industries. Manufacturing output is 6.3% below its peak before the recession.
This decreases net trade since it means that the UK has less manufacturing goods to export, and
therefore they can export less. Manufacturing and construction used to make up a huge part of the
UK’s exports e.g. the shipbuilding industry, but recently this has become less important. This
decrease may have led to the UK’s trade deficit. This factor is likely to be less significant since
there are many other industries which could increase exports and reduce the deficit. There has
been high output in general, the highest rate in the G7, and so this cannot be that significant.
Another reason could be the high growth within the UK. GDP has risen by 40% since 2000. This
means consumers will have a higher income and will have more demands that cannot be met
within the UK. This will lead to an increase in imports, and therefore increase the trade deficit. The
increase in indebtedness means that there has been an increase in consumption and so this could
be a reason.
The most important reason is the UK’s low productivity. It is 20% below the average for the rest of
the G7. This will mean that costs are higher since production is not efficient and so more
resources/time are needed to produce the same amount of goods as other countries. Higher costs
lead to higher prices, and this makes UK goods less competitive. Not only will this decrease
exports, it will increase imports as UK consumers will want to buy the cheaper goods from other
countries. The price will depend on the exchange rate, and since the pound is stronger than other
currencies e.g. the euro, imports will be even cheaper and exports even dearer. This is the most
important reason since it impacts all industries, particularly the service industries, and both exports
and imports.
Teacher’s comments: 8/10
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c) With reference to Extract A, paragraph 2, explain one likely influence on UK investment.
(5)
Investment is business spending on capital goods. One factor it depends on is interest rates. The
fall in interest rates to 0.5% will have helped investment to grow by 5%. Firstly, the fall in interest
rates makes borrowing cheaper and this will encourage borrowing since the rate of return on
investment needs to be lower to be able to pay back the loan. High interest rates means that firms [Show Less]