https://cpes.org.uk/om/files/original/f99e5ce1967e7424b6ce4860ad51ebc8.pdf e60a6414df84bc95e0bfaa325499bb94 Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Title A name given to the resource Problems in the Management of the Economy 1971 - 75 Text A resource consisting primarily of words for reading. Examples include books, letters, dissertations, poems, newspapers, articles, archives of mailing lists. Note that facsimiles or images of texts are still of the genre Text. Text Any textual data included in the document Chapter IV The balance of trade The ma1.n purpose of this chapter 1.s to esttmate the net. ::os::. 1n t~ rms .)1 resources (i.e. the excess of exports over 1mports measured at 1963 pr L~· s) .:JI maintaining a satisfactory balance of payments position- The p rev LOUS ·.hdp t· r has examined the balance sheet of foreign assets and ltabilr.tLes together w1th balance of payment~ flows (long-term capital, trade ~redit, property 1ncome and transfers) which affect the net reserve position, in order to estab!r.sh thE size of surpluses or deficits on trade in goods and services wh1:::h would be required to maintain a satisfactory level of reserves in relation t"J short-tEn liab1.lities over the entire period 1960-75. These trade targets Whl~h rhe PJI economy is required to achieve in order to satisfy the ba-lanu' of p iym··n·,__ objectives, included in the definition of par (see the 1.nt rndu·_ ,_,_,ry h qnn l, are given in detail in Appendix Table 5 and summa.nsed in TablPs IV-l ,md 11/-:' below2. The results of the prevr.ous chapter make r.t possible to obta1n prcdt_tt0nt of the effect on the reserve pos1tion of any assumed actual balance of tr-:1de flows, In this chapter we shall therefore also estimate the r.mpact on the reserve position of GDP growth at 4.5% per year from 1971 to 1975 under the assumptions (a) no devaluation of the exchange rate (Projection I), and (b) substantial devaluation at end-1973 (Projection II). These estimates will show the problems whr.c.h may arr.se as the econ·'Jmy 1s bro·Jgt back to the par pressure of demand in the next few years. Summary of conclusions 3. Table IV-1 below compares the net resource ~ost of the trade def1~1ts and surpluses actl.lally achieved from 1961 to 1971, and expected under the as::.umptl· of paragraph 2(b) above for 1972-5, with the resource cost to the par economy achieving its required trade targets. On average the resource cost (tn 1963 IV-2 prices} of achieving a small positive target (at current prices) has over the period 1960-70 been a small positive amount. By 1971 external circumsLances appear to have become particularly favourable in the sense that an actual trade surplus of about £600 million has been achieved at a very modest resource cost (£118 million at 1963 prices) and the par economy ~an earn a target surplus of £105 million at a negative net resource cost. The project1ons to 1975 1mply that the cost of achieving a po~itive trade surplus wtll have rtsen, by 1975, to a level similar to that which would have been required in the 1960's. Table IV-1 The resource cost of trade surpluses £ mL·u.LOn, annua 1 averages iI Actual Par ! · Trade surplus Resource Trade target Resource .:os t (l) (current cost (l) (current (1963 prices) prices) (1963 pri.:es) I pnces) l 1961-5 1966-70 1971 -258 -93 602 Projected(Z) 1972-5 -76(3) 19 75 212(3) -229 -105 118 -230 (3) 20 3(3) 8 80 105 190 250 16 41 -149 -29 168 (l) Exports less imports of goods and serv1ces at 1963 pr1ces. (2) Value of trade surplus deflated to 1970 values (see paragraph ll). (3) Hypothetical projection assuming 4.5% per year growth oi GDP and devaluation at end-1973 (Projection 11). See paragraphs 2 and 32. 4, Table IV-2 below shows the effect on the net reserve pos1t1~n cf balance of trade flows, From 1961 to 1970 the net reserve effect of actual trade deficits an0 surpluses was on average almost exactly equal to the trade balance because, as the previous chapter has shown, net earnLngs on property 1ncome IV-3 supplemented by increased IMF drawing rights just about balanced the net outflow of transfers, long-term capital and trade credit. In 1971 the non-trade items (induding £125 million of SDR's and a net inflow of long-term capital) augmented the effect of a large trade surplus to produce a net reserve improvement of over £1,000 million. But for 1972-5 adverse non-trade flows comb1ne with trade deficits projected under the hypothetical assumptions of paragraph 2 above to produce a large depletion of reserves net of short-term l iabi lit it'S. The table also shows how the par e:onamy 1s requ1red to achieve r1s1ng trdde targets, and accumulates net reserves up to 1971 partly 1n order to absorb some of the adverse non-trade flows by reducing net reserves 1n the period 1972-5. Table IV-2 Reserve effects of the balance of trade Trade balance Tota s over _per1. o d ' £ ml. 1on, current pr1ces Actual Par Net reserve effect Trade target Net reserve effect 1961-5 -1290 1966-70 -464 1971 602 proJ. ecte d(l) 1972-5 1 -305(2) -1273 -443 1040 -14 70 ( 2) 41 400 105 760 58 421 543 -405 (1) Deflated to 1970 values (see paragraph 11). (2 ) Hypothetical projection assuming 4.5% per year growth of GDP and devaluation at end-1973 (Projection II). Assumptions and method of analys1s 5. The par economy is assumed to achieve its requ1red trade target without any deflation of demand (i .. e-. continuously maintaining 2.5% unemployment) by the use of measures (such as exchange rate changes) which strengthen or weaken the competitiveness of U.K. producers, and in so doing shift the terms of tndc IV-4 by raising or lowering export prices relative to 1mport pr1ces This assumption 1s the most favourable, as regards the resource ::ost of meeting potent1al short- falls on the balance of trade, whi:h could be made. If deflation 1s ~sed as a method of balance-of-trade adjustm~n: r.he resour:.e ;::.ost of a·:hieVln6 the trade target W1:>uld obviously be very mu-::h gre"'ter. 6. Our analysis proceeds in two main S' .:1ges F1rst, starting \vtth tht: ~~tual balance of trade on goods and services (as measurEd 1n the nationdl 1uc:c1me accounts) we estimate the volume and v1luE ot impJyts and l:'xp:nts wh1:-h w~... uld be the ::ounterpart of a par pressure of demand, assum1n5 no :.hange in the actual competitiveness of U K producers The se;::.ond stage ol dnalysis starts w1th a comparison of this 'full-employmenr ~ balance of 'rade w1th ·th<:: r·equ1red trade target; the differen:e represen~s the pJtencial ~rade gap r~ma1n1ng to be closed by an ad_1ustment of the competitiveness of U K. pro:Jd'J.::.ers. An est1mate 1s made of the effect on the value and vrllume of imports -.:1nd export& ot the etlc q·,·e devaluation or revaluation required to close the '· radt' g-:tp The ·x···o.·· ,.1. rlH' volume of exports over the volume of imports estim..Ittd 1n this way 1~ the resource cost to the par economy of achieving the trade target. Adjustment for tne pressure of demand 7. The first adjustment defined above (t.e. the adJUStment of the actual balance of trade to tne par pressure of demand) 1s 1n fa:t calculated as an adjustment of the volume of imports alone leaving un::hanged the terms of trade and volume of exports. If there were strong e~iden~e that a change in the pressure of demand dire-:tly affects export volumes or values, lt would be necessary t~ adJUSt exports at this stage; but the available eviden_e on th~s po1nt 1s weak l'here is some reason t_o expect a change in the impc-rt pnce 1ndex (based at 19f:d) ac.::;lmpanying a change in the pressure of demand becau&e the pr1ce .~.ndex for 1mp.nts ;H m tnu- factures, for which the marginal 1mport IJropens~ty may be lngh, has ruen foster than prices of imported food and raw matertals [nu::, ..HI inL:tcdS.' 1!1 the pressure IV-5 of demand would have tended to ra~se the 1mport pr~ce index in recent years and redu~e the index in years before 1963. We have not been able t~ establish the quantltative importance of this effec:t and therefore assume that the terms of trade are insensitive to the pressure of demand. 8 The marginal propensi:':y t:'l import, defined as the ratio of changv:-. tn the volume of imports to changes ~n the p:Jstulated level of GDP, must be assum<~d 1n "ur analysis to oe li.igli.er than the average rat1o :Jf 1mpocts tu GDP sLnce the adjustment of demand from a~tuai t~ par level~ 1s assumed not to comprise any change in puolic expendi.tun on go:-~ds and serv1;:es whtc.h itst::lt has a belowaverage import content. Using input-output estimates of direct and ind~rect import -:ontents of different categories of exper.dHure 1n 1963 and 1968 and making allowance for cli.anges in the cnmposi tion of demand, the marginal ~mport propensity (at 1963 prices} for adjustment from actual io pdr levels of GDP ts esttmated to have risen from 251. in 1960 to 36% ~n 1971, and is proJe:ted t;1 continue rising by 17. per year to 1975 Adjustments to close tli.e trade gap 9- The second stage of adjustment ~n our analys1s requtres us to estimate tli·· effects of a change of competitiveness sufficient to close any gap betwet::n the trade target and the 'full employment' trade balan~e (the actual surplus or deficit adjusted to the par pressure of demand). We assume that a change ~n competitiveness is reflected in a shift 1n the terms of trade ~nd leads to a change in the volume of exports but does not affect the volume of imports. Th~s assumptton lS made principally for c:mven1ence and has almost no efte;:t on the estimated resource cost of meeting the target balance of trade. lt ts h~rd to find evidence 1n recent U.K. expeoen..:.e that devaluatlo.n has hdd an:, st,sruflcdnt influence on the volume of imports, so that tn any case our as::.ump· iJll may n,1t be too unrealistic. .... _.,... ...... . ,._ ·,. ~ : ·.- ~>. .!. -·-· ... - ·_; -·· ', ·.- IV-6 10 The increase in the volume of exports assumed to follow from a forced deterioration of li. in the terms of trade is 4-3%. This implies an 1mprovement in ·he balan::e of trade equal to 3 3% oi the value of exports, and a resource cost (in ~urrent values) of £130 million for an improvement of £100 million in the balance of trade. These quantitative adjustments do not directly define the elasticity of foreign demand for UK exports because part of the terms of trade shift might oe obtained through a change in the dollar price of UK importsIf the terms of trade is shifted through an exchange-rate devaluation or revaluation the sterling prices of imports and exports may be expected to change substantially; out again, the assumptions made above do not commit us to any particular view about the change in sterling prices or the .elasticity of supply of exports. 11 To avoid the need for assumptions about changes in pr1ce levels we express par imports and exports at 'constant 1970 values', abstracting from price movements not reflected in the terms of trade (because they are common to both .Lmpur-i. and export prices) oy deflating current values by the import price deflator (based at 19 70). The value of par imports (measured in this way) 1s therefore unaffected by terms-of-trade changes, and the entire balance of trade adjustment, not only of volumes out also of values, is thrown onto exports. Trade flows measured 1n 1970 values are denoted in the Appendix Tables and 1n formulae given below by a suffix 70. The problem of relat~ng the balance of trade expressed 1n this way to non-trade flows and to the net reserve position has been discussed 1n the prev1ous chapter (paragraphs 11 and 21-4). The par balan:e of trade, 1960-71 12. Given the general method outlined 1n the preced1~g paragraphs, the steps followed 1n calculating the resource cost of ach1ev1ng the target balance of trade at the par pressure of demand in the period 1960-71 may now be described. Adjustment of the volume of imports us1ng the estimated marginal propensity IV-7 dis~ussed in paragraph 8 above is given by - M* M+ (0 25 · 0 Olt)(Y*- Y) - where M*, M are par and actual imports at 1963 pn::es, Y*, Y ar(' pdr and a:tual levels of GDP, and t 1s a trend r1s1ng from 0 in 1960 to 11 in l97t. The value of par imports at :::urrent pri::.es, M*, 1s estimated as M* M- * M M whet>:' M 1s actual imports at current pn :es. The 'full-employment' trade b~lance is now obtained as X- M*, where X 15 actual exports at current pn ces 13 The estimated full-employment trade balan.:::e shown i.n Table IV-J beLow is posuive throughout the period 1960-70, Wlth the exception ot the yeat~ 1'}6l,J, 1964 and 1967-8, because actual GDP was well above par up to 1969 and the adJustment to par GDP mere than compensates for recorded trade defic1ts But by 1971 the sh0rtfall of actual c.omparea wtth par GDP 1s suff1ciently large for the adjustment to absorb a large part of the recorded trade surplus, reducing the ·full-employment' balance to under £200 millions. The detailed results are given in Appendix Table 6. 14 The trade gap at par levels of GDP can now be calculated as the difference between the tr~de target, BT*, and the 'full-empl.oyment' trade balance, X- M* (see Table IV-3 below). Up to 1966 th1s gap fluctuates; it 1b large a.nd positive for 1967-8, and negative tor l969-71 IV-8 Table IV-3 The trade gap at the par level of GDP, 1960-71 Year Target balance of trade 1960 1961 ;' I 1962 I I 196 3 I I 1964 I I 1965 I i 1966 I I ! 196 7 I 1968 I l 1969 l 1970 I 19 7! I ! i I ! i ! i ! -so -30 -10 10 30 50 70 80 90 lOO lOO lOO (l) See paragraph 11 E millton, 1970 values(ll 'Full-employment' balan::e of trade Trade gap -154 172 84 124 -172 213 313 -280 -112 331 2 31 168 104 -202 -94 -114 202 -163 -243 360 202 -231 -131 -68 I I ! I 15 The trade gap, defined as above, is ot course also equal to the d1fference between the required value of exports and the a::tual value assumed in the 'fullemployment' trade balance. Expressing the trade target and the value of imports at 1970 values (see paragraph 11 above), the required value of exports :LS X*70 = BT*70 + M*lo and the trade gap is equal to where x70 is the actual value of exports, deflated by the 1mport pr:tce deflator (based at 19 70), ·- IV-9 In The se :.ond s'i:age of analysis rE-quires us to est~mate the changes 1n UK :.::>mpetlt:C:veness, reflected in adjustments of the terms :1£ trade, requ1red tu ~- :l~se ·he trade gap- An initial estimdr.e, I:', of the t:erms of trade wh1.ch Hsu!.d be sufficient to clc~e the trade gap is given, under the assump':~ons of !'dragraph 10 above, by the formula A TT = TT l- l X*70 - x7o 3 3 x7o wh(Cre l'T ts ::he ,1::.t:ual terms ot ~rade This :0rmula prov1des estimates or the yequlred par terms or trade in each year whl=h still reflect year-to-year flu:_tt:-Jtt,:.ns in che a::':ual terms of trade and wh1:::h 1mpli:::itly assume .:~n tnstan- t:mes11S :-espor;se of exporrs to the terms-of-trade adJustment I 7 A smooth1ng procedure is then used to calculate a par terms of trade, TT-A. bearing in mind the need to allow some lag in the reaction of the balance of trade to exchange rate adjustments and at the same t~me smoothing to some extent fluctuations provoked by the irregul.ar moveme.nt in the terms of trade resulting from c>rrati.c changes in the price of food and raw materials imports and in actual. export pr~ces i8. As noted in paragraph 14, the trade gap at the par pressure of demand has fluctuated over the period 1960-70, showing alternating positive and negative ViliiH!S The smoothed par terms of trade is therefore much the same, on average, as the actual terms of trade and like the latter shows no pronounced trend althou it begins to move up quite sharply after 1969 implying that trading conditions r, . ,y,_, lwe11 1-('r'' favourable to the L· K 1n the two years 1970-1 (see Appendix Table 7) 19 Giv~n the par terms of-trade and the p:u value of exports (paragraph 15) , measured relatjve to import prices (at 1970 values), we can obtain the requ1red oar volume of expo~ts at 1963 prices, i*, by the ident~ty IV-10 where TT* is the par terms of trade (base 1963;100) and the last term is the deflator for Import prices 1n 1970 relative to 1963. The resource cost of achieving the trade target at the par pressure of demand IS then X* M* Ottatled results of the sequence of calculations are given 1n Append1x Table 7 dOd the ~stimated resource cost has been summarised 1n Table IV-1. IV - 11 The ~r balance of E_rade~ 1972-5 20. Estimates of the resource cost of achieving future trade targets w1ll be obtained by essentially the same method as that we have used for the past period (}960·7!), The first stage ot analysis of the past pEriod was to adjust the artual balance of trade to the par pressure of demand. In projecting the future, 1972-~, we shall start with estimates of probable changes 1.n the balance ot trade at the par pressure of demand and at hypothetIcal actual terms ot trade. These initial estimates are in effect a project1on ot the tull-employment balance oi trade 21. The second stage of analysis 1s 1dentical to that used for the past period. Given the 1nitial projection of the ' tull-employment' balanr.e of trade and a tequired trade target (obtained in the pr.:vious chapter). we ·estimate the terms-oftrade adjustment required to achieve the trade target and hence the resource cost ot the par balance ot trade. We find that the par terms ot trade wlll have to fall back by 1975 to about 100 (base 1963} from the level oi 102.5 which was adequate in 1971, and that the resource cost of ach1eving the trade target (ItsElf substantially higher by 1975 than 1n 1971) will increase from 1971 to 1975 by over £300 million at 1963 prices (see Tables IV-1 and Appendix Table 7). 22 The in1.tial projection, which establ1shes the expected future 'full-employment' balance of trade" assumes that the actual terms of trade (which rose sharply from 100 .. 9 in 1970 to 103,7 in 1971) will gradually return to a level ot about f103 0 in 19750 This assumption is bastd on the expectation that U_L competitive- I nEss wlll not detenorate rap1dly, and that by 1975 world prices of food and raw materials \vill catch up with the inflation of world prices ot manutactures and make good some of the ground lost In 1970-71. 23. Give~ this terms-of-trade assumption, we estimate the growth oi tlw volume ot exports and Imports at the par level of GDP, But before d1scuss1ng thesE est1mates we must explain the way 1n which we have treated the effects ol entry IV - 12 1nto the EEC, As regards trade in ~ndustrial products, the> progressive r<·,~,,. ,on 111 tariffs must be expected to stimulate the volume of trade in both dul'· Llous .. No allowance has been made for this effec.t ir. our projections because we have not been able to estabhsh any presumption as to the net effect on the U.,K. balance of trade· any allowance for increased gross flows will not materially affect the results of our analysis. 24.. The expected increase 1n the value o.f agricultural imports i.nto the U K. follow~ng ~ntroduct1on of the CotmnOn Agricultural Policy is also nor ·e>.;:ilcitly Introduced in our project1ons. The reason for this is that a substantial saving ~n fuel imports is expected over the same period. as a result of the exploitation of North Sea gas and o~l sources; we regard the fuel saving as largely offsetting the increased cost of agricultural imports. It ~s worth noting that the fuel sav1ngs do not realty 'p~i- for these costs of EEC entry because the counterpart of reduced fuel imports is a larger outflow of property income discussed in the previous chapter (paragraphs 14 and 19 1 chapter III). 25. Table IV-4 below shows the growth in the volume of exports and imports (adjusted to the par pressure of demand) in the past (1961-71), and the growth rates projected under the assumptions of the previous paragraphs for 1971-5. Exports are projected to grow at 5% per year. about the same rate as from 1969 to 1971 and rather faster than in the pre-devaluation period 1961-5 .. Table IV-4. The growth of export and import volumes (Growth rates, %per year) Exports of goods and Imports of goods and services at 1963 ~rices services at 1963 prices adjusted to par GDP 1961-5 1965-9 1969-71 Projected(l) 1~Hl-5 3.7 6.6 4.9 5.0 3.5 6.4 8. 3 7.5 O,) On the initial terms of trade assumption (see paragraph 22 ) IV - 13 26, The table above shows that the par volume of imports has grown at an accelerating rate, and has increased particularly rapidly in the past two years (1969-71). The par growth rates since 1965 simply reflect the rapid growth of the actual volume of imports (4.9% per year 1965-9 and 5.7% per year 1969-71) at a time of slow growth of GDP and a falling pressure of demand, The acceleration 1n the total volume of imports is largely due to the ris1ng share of imports of manufactures in the total, and partly to an accelerat1on in the growth of imports of manutactures themselves; imports of tood and raw materials show little trend 1ncrease. The future growth of the volume of imports at the par pressure of demand is proJected at 7 5% per year for 1971-5 Th1s may prove to have been a conservat1ve project1on, but s1nce we do not have a prec1se quantitative explanation of the past growth of imports it would be wrong to be too much influenced by the growth of estimated par imports in the last two years. ?7 The ratio of imports to GDP, whether at actual or par levels, has r1sen steadily from about 22% in 1961 to over 27% in 1971 Our projection of the future growth of imports implies that the ratio of par Imports to GDP will r1se to 32 3% in 19 75 Table IV-5 below shows the ratios of imports to GDP at factor cost 1n various other 1ndustrial countries 1n 1963 and 1969 It 1s notable that this ratio has increased substantially between the two years in all the countries shown 1n the table; the r1se 1n imports 1n relation to GDP cannot therefore be explained simply as a result of the decline 1n the general competitiveness of each country. It is also evident from the table that the ratio of imports to GDP in the U.K was not particularly high as compared wHh other European countries, particularly when allowance is made for the dependence of the U.K. on imported food and raw matertals The evidence of this table therefore retnforces our expectation that the growth of imports will substantially exceed the growth of GDP over the next few years . --· .,;_ IV - 14 Tab 1e IV- 5 . Th e .rat~o o f .~mports o f goo d s an d .serv~ces (I) to GDP at factor cost Country 1963 1969 Cat 1963 prices) Japan France Italy Germany Denmark Belgium Norway Nether lands UK 11 .5 15 5 19 6 20 8 35 2 42 .1 47 .7 55 2 24 1 13 2 21 0 23 8 25,1 45 2 56' 1 55 2 69 6 27 1 Including property income paid abroad Sour~e; Cal~ulared from OECD, Main Ind~cators 28 The initial ·full-employment' trade balance ~s estimated to show a deficit of about £1.300 m~llion (at 1970 values) by 1975 because the volume of 1mports ~s projected to grow substantially faster than the volume of exports and because of a slight deterioration in the terms of trade The target balance of trade which the par economy is required to achieve r~ses to £250 million in 1975 so that the ~mplied trade gap, at the projected .terms of trade of 103 .. 0, ~s over £1,500 m1llions 29. In the par economy this trade gap ~s closed by adjustment of the terms of trade (see paragraphs 9-10 above); the smoothed par terms of trade are therefore required to fall back to about lOO in 1975 inducing an improvement in the volume of exports sufficient to achieve the target trade surplus The resource cost of meeting the trade target is estimated to rise from -£149 million (i e a net ga1n .1n resources, measured at 1963 prices, from trade) in 1971 to +£168 million in 1975 The resource cost of achieving the target is of course very much less than the si7e of the trade gap because a large trade deficit implies a large net gain of resources (or negative resource cost) from trade. · _...,<..- ~.... ·: :·.· 1V - 15 Sensitivity of the projections 30. The estimates given in the previous paragraphs are based ou very uncer' 1in projections of the terms of trade and the growth of import and export volum1 If we assume that the par volume of imports will grow at 7 0% instead of 7. · t per year, the 'trade gap' in 1975 falls to under £1,300 million, and if furt 1er the volume of exportsis assumed to grow at 5"5% instead of 5% per year, it 1 s reduced to about £1,200 million" The par terms of trade could then be irnprcved by nearly 1% and the resource cost of achieving the target balance of trade in 1975 could be reduced by about £100 million to £70 million (at 1963 prices), Thus every 1% per year reduction ~n the projected growth of import volumes, or increase in the projected growth of exports, will reduce the 1975 trade gap by about £300 million (at 1970 values) and reduce the resource cost of achieving the target trade balance by about £100 million,, 31. Our initial assumption is that the terms of trade could be expected to fall to 103 . 0 (base 1963·100) in 1975 compared with a level of 103 1 1n 1971 If in fact the terms of trade improve to (say) 105.0 by 1975 without any adverse effect on the projected growth of imports and exports, the estimated trade gap will be reduced to about £1,300 million with a saving of about E60 million (at 1963 prices) in the resource cost of achieving the target trade aurplua On the other hand if the response of the trade balance to a change in the terms of trade ia less elastic than we have assumed (see paragraph 10), the resource cost could be substantially greater·' Bearing in mind all the uncertaintiu, our initial figure for the resource cost to the par economy of achieving the 1975 target surplus, eatimated as £168 million at 1963 pricee, may be regarded · subject to a margin of uncer~ainty of up to + £150 million. Ptojections assuming 4o5X per year growth of GDP 32, The par projections to 1975 can be modified by the same methods used to obtc past par estimates in order to examine the conaequencea for the balance of trade r IV - 16 of any assumed futute growth of actual GDP and terms of trade The following paragraphs will describe two hypothetical projections, both of which assume 4 5Z per year growth of actual GDP from 1971 to 1975 The first projection assumes that ~he future terms of trade will be those assumed in our calculation of the 'fu 11-emp loyment' balance of trade (see paragraph 22), which are in effect expected .I: actual terms of trade The second projection assumes a substantial devaluation at ~.: end-1973 wh1ch reduces the terms of trade to below lOO by 1975 '( 33 Thes·' two hypothetical projections suggest that 4 5% growth of GDP would lead to severe balance-of-payments problems before 1975 A trade deficit 1s expected by 1973, and without devaluation th1s deficit is projected to use to about £1,800 mi l 11 on by 19 75 The devaluation at end-1973 restores the trade balance to a surplus of £200 millfon in 1975 3~ The eif~cts of these projections on net reserves can be estimated using the projected non-trade flows obtained 1n the previous chapter. Table IV-6 below summarises the net reserve effects The details of the balance of trade projections are given in Appendix Table 8 Table IV-6 Alternative projections of the balance of trade and net reserves(!) l: [972 1973 Balance of trade 148 -396 Current balance 425 -191 Other (2) flows -203 -410 Net re serve effect Cumu 1at1. ve (·3) reserve effect 222 -601 222 -379 Projection I 19 74 -1051 1975 -1828 -988 - 1839 -500 -586 -1488 -2425 -186 7 -4292 Projection JI l974J -269 -206 -500 -706 -1085 1975 212 201 -586 -385 - 14 70 ~·-~ (1) Hypothetical projections assum1ng 4 5% per year growth of GDP ( 2) (see paragraph 32) Long-term investment. trade credit, etc. (includes £118 million receipt ( 3) of SDR's in 1972) Cumulat1ve effect since end-1970 .. _. .··. "- IV - 17 35. The table show& a projected trade surplus of fl50 million (at 1970 values) in 1972, and a current surplus of over £400 million But since the receipt of Spedal Drawing R1ght s is- insufficient to compensate for the outflow of long-term inve&tment and trade credit, the improvement in net reserves 1s only £150 million. By 1973 the trade balance shows a substantial defLcit. whose effect on the reserves 1s augmented by other· flows Without devaluation the reserve position deteriorates enormously 1n 1974-5 because of large tradE deflc1ts and cont1nued capital outflows Projection II. assum1ng a devaluation at end-1973, shows a trade surplus for 1975,. But the non-trade 1tems are sufficiently adverse by the latter year to produce a cont1nued drain on the reserve position Balance of payments dif.i:icult ies, 1972-5 36 All these projections ate based on uncertain assumption's about the likely growth of imports and exports. movements of the terms of trade, and changes in other balance of payments flows But even Lf cons1derably more optimistic assumptions are made the risk of a substantial balance of payments problem by 1975 still appears to be h1gh unless the level of GDP is held down well below the projected par level consistent with 2 5% unemployment. 37. Balance of paynents difficulties implicit in the project1ons to 1975 result from the conjuncture of several major adverse factors, compared with the 1971 posit1on: (a) The fast-growing category of imports, manufactures, forms an increasingly large share of total imports . (b) The par pressure of demand, higher than that actually experienced in 1971, must be expected to raise the volume of imports relative to exports. (c) Entry to the EEC will require substantial transfer payments and cause some 1ncrease in the cost of food imports (d) The net outflow of long-term capital will increase as inward oil investment falls off. ··-. ·.-..;.~ IV - 18 (e) The net inflow of property income will be reduced as returns to recent inward long-term investment are obtained. (fl A large net outflow of trade credit will be required to maintain the growth of exports The only favourable factor to be expected over the next few years LS the saving in fuel imports provided by the exploitat1on of North Sea sources. 38. The possibility of substantial balance of payments difficulties over the period to 1975 has important Lmplications for the allocation of resources Balance of payments problems have generally in the p:::tst led to some deflation of domestic demand; the resources available over this period could therefore be reduced below par levels if for balance of payments reasons the pressure of demand is not allowed to rise to or above par by 1974-5.  Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Title A name given to the resource Chapter IV The balance of trade Creator An entity primarily responsible for making the resource Cambridge Economic Policy Group Source A related resource from which the described resource is derived Problems in the management of the economy 1971 - 75 pages IV-1 to IV-18 Date A point or period of time associated with an event in the lifecycle of the resource 1972