European Business Essay Example | Topics and Well Written Essays - 2500 words

European Business - Essay Example Factors that can be held responsible for the current account deficit are noted below: Deficit in goods – Due to de-industrialisation, the UK has had a very large deficit of goods. Besides being a manufacturer of goods, the UK has increasingly become an importer of manufactured commodities such as, clothes, computers and cars. The UK is also an importer of food and oil. The surplus in service partly offsets the deficit in goods, but is not sufficient in order to overcome the trade deficit. Relatively low rate of saving – Individuals residing the UK has a relatively low rate of saving as compared to that of other countries. Then again, despite a rise in the saving rate, deterioration in the current account could not be prevented. High consumer spending – A rapid growth in consumer spending leads to an increase in imports, which in turn adversely affects the current account. During a boom in the economy, the saving rate appears to fall, unlike consumer spending, which increases and leads to a current account deficit (Economics.Help, 2014). It is the value of one country’s currency in terms of another, indicating the rate at which a currency can be exchanged for another. The balance of payments model states that the foreign exchange rates are at an equilibrium level if the current account balance is stable. Reduction in foreign exchange reserves occurs due to a trade deficit, which ultimately depreciates the currency. In case of undervaluation of a currency, the country’s exports are rendered affordable and imports expensive. TOT reflects the amount of exports needed to be sold in order to purchase imports. There is an improvement in the terms of trade if the price of exports increases and vice-versa. A prolonged decline in the terms of trade reduces the standard of living. On the other hand, an improvement in the terms of