Question

The goods-trade gap was £8.3bn, compared with £7.6bn in October, the Office for National Statistics said today. Economists predicted £7.5bn, according to a Bloomberg News survey. The Bank of England last week cut the benchmark interest rate to 1.5pc, the lowest in its history, to combat the recession. Policy makers said that the world economy ``appears to be undergoing an unusually sharp and synchronised downturn'' which will hurt global trade. “We see another rate cut in February,'' said David Page, an economist at Investec Securities. ``The bank is aware that we're going through a particularly sharp adjustment in global demand.'' Exports fell 5.8pc on the month while imports dropped 1.8pc, the statistics office said. Overseas sales of oil, chemicals, cars and other commodities slipped. The goods trade gap with countries outside the European Union widened to 5.3bn pounds in November, the most on record. The trade surplus with the U.S. narrowed to £301m, the smallest since February 2007, the statistics office said today. Oxford, England-based Electrocomponents Plc, a supplier of 350,000 products from cables to calculators, said last month sales worsened on weaker demand in Europe, the Asia-Pacific region and the U.S. The International Monetary Fund forecasts recessions in the US, Japan and the euro area. The UK economy contracted 0.6pc in the third quarter after stalling in the second, government data show.

a) What has been the recent performance of the UK trade balance?

b) What has been the reaction of the Bank of England to the current economic recession?

c) Which was the economic rationale behind the BoE decisions?

d) How effective was monetary policy?

Answer 1

a. It has been observed that recently UK trade balance has been declining. The trade gaps with the rest of the world has been widening and trade surplus with some nations is also decreasing. Thus, UK trade balance is declining.

b. The Bank of England has recently increased money supplied which has led to fall in the rate of interest in the economy.

c. The fall in the rate of interest will reduce the cost of investment spending in the economy and thus lead to increase in the level of investment in the economy and this will increase the overall level of aggregate demand in the economy. increase in aggregate demand will help in overcoming recession by increasing the level of national output of the economy.

d. The monetary policy was effective in increasing the aggregate demand in the economy along with expansionary fiscal policy of the government. Thus, it can be stated that policy mix helped the economy to overcome recessionary conditions.