Posted: September 22nd, 2016

Explain the significance of long-term deficits to open economies

Task 1 (LO1 AC 1.1, 1.2, 1.3, 1.4)

LO1: Understand the significance of international trade and the balance of payments to open economies such as the UK

UK, England, London Listed Palm Oil Firm Gets Cooking After £1.1bn Bid
(By Oscar Williams-Grut, Evening Standard 10/10/14)

‘You can cook with it, it does in everything from margarine to soap and it’s even used to make plastics – palm oil is big business thanks to its presence in the London commodities markets. Malaysian conglomerate, Sime Darby, one of the world’s biggest producers of the stuff, today offered £1.1 billion to snap up London-listed New Britain Palm Oil, a sustainable palm oil producer.
The 715p-a-share offer represents a whopping 85% premium to yesterday’s closing price, for a firm that has flown under the radar of most in the City. The vegetable oil, popular in Africa and south-east Asia, has recently attracted negative press from environmental groups as forests are often cleared to make way for palm trees.
New Britain Palm Oil, which has palm fields in Papua New Guinea, produces its wares in an environmentally friendly way. Its position in London gives Sime Darby a foothold in Europe, where demand for palm oil is growing fast. New Britain Palm Oil leapt 288.5p to 675p.
News of the blockbuster deal boosted Dekel Oil, an Ivory Coast-focused palm oil producer, 0.1p to 1.47p, amid hopes of further consolidation in the sector. Optimism in US and Asian markets overnight helped the Footsie shrug off its recent gloom, adding 46.15 points to 6528.39. Traders pointed to dovish sentiments in the latest Federal Reserve minutes. Comments from the Fed expressing concern about the strength of the dollar also helped gold prices, giving a welcome lift to producers.
Fresnillo added 43p to 766.5p, Randgold Resources climbed 290p to 4341.5p, Antofagasta put on 22p to 696.75p, Polymetal International improved 23p to 493.9p and African Barrick Gold rose 6.1p to 206.2p. Egyptian gold producer Centamin, up 2.85p at 60.57p, was lifted by third-quarter production figures, which revealed a 15% rise in production compared with the prior three-months. Californian, USA customer services software specialist Kofax collapsed 49.75p to 420p after missing first-quarter forecasts. It was blamed on large software deals taking too long to complete.

1. Explain the importance of international trade to an open economy such as the UK
(This provides evidence for assessment criteria 1.1)

2. a) Define Comparative Advantage, Absolute advantage and Terms of Trade & Exchange Rate

b) Assess the significance of comparative advantage, absolute advantage, the terms of trade and exchange rates to the UK economy
(This provides evidence for assessment criteria 1.2)

3. Taken that the balance of payment of a country “Sangala” comprises the following main items (all figures in millions of £): exports of goods 400; imports of goods 500; government (invisibles) -150; other invisibles +200; investment and other capital flows -45.

Describe the structure of the balance of payments and calculate the:
a. Visible trade balance,
b. Current balance and
c. Balance for official financing.
(The above provides evidence for assessment criteria 1.3)

4. What is Surplus and Deficit in an economy?

a. Explain the terms ‘surplus’ and ‘deficit’
b. Explain the significance of long-term deficits to open economies
(This provides evidence for assessment criteria 1.4)