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Economic and non-economic reasons

This may have been because of many different economic and non-economic reasons. Economically this could have been because of interest rates in the two nations. The interest rate influences the exchange rate because it influences the demand and supply of currencies on the foreign exchange markets. A good deal of the trade in foreign currencies is for speculative purposes – traders moving funds from one currency to another to take advantage of price movements or to take advantage of better returns in different countries.

For example, if the rate of interest in the US was 3% but was 5% in the UK, there may be advantages gained from transferring funds from the US to UK . ( e. g. moving money from a bank account paying 3% to another bank account paying a higher rate of interest. ) If this happened, there would be a move towards selling dollars on the foreign exchanges and buying Sterling, with the result that the demand for Sterling would raise and the supply of dollars would also raise.

This would put pressure on the price of Sterling and push its value up against the dollar. The end result would be an appreciation of the pound meaning

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that it would be worth more in terms of dollars (e. g. rising from 1 = $1. 60 to  1 = $1. 70). This in turn means that the US buyer now has to give up more dollars to buy the same amount of Sterling, which is an effective rise in price for imports. Non-economically this could be because of the US terror attacks and the commencing of the war on terror, or the US presidential elections in 2000.

The graph demonstrates the fact that over the last 10 years trade in goods and services, income and current transfers has gradually increased. The Pink book tells us that the USA is consistently the single largest counterpart country within the UK’s balance of payments, representing 20 per cent of current account credits and 15 per cent of debits in 2003. There has been a current account surplus with the USA in each year since 1992.

Prior to 2000 these were typically between  2.0 billion and  4. 0 billion, whereas the most recent periods have seen significantly higher surpluses. 2003 shows a record surplus of 18. 6 billion. Evaluation The UK’s trading position is heavily reliant on the changing nature of competitiveness across the world. Emerging markets, notably five nations dubbed as the BRICK nations — Brazil, Russia, India, China, and South Korea are all becoming viable competitors to more established countries and now can benefit from international trade.

There are a number of factors which influence the competitiveness of the UK internationally, these include- the level of domestic inflation compared to our competitors, levels of productivity compared to our trading patterns and the level of physical and human resources. These all effect the unit cost of production. By monitoring who we trade with helps us to identify the changing global trading positions and how the UK may be able to influence this. The UK can gain from trade in many ways; decrease in costs, increase in competition, differences in demand and other non-economic advantages.

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