Revision: Consumption and the Trade Balance

The amount that we spend has a direct effect on the balance of trade in goods and services. The evidence is strong that consumers in Britain have a high marginal propensity to import goods and services so that, when their real incomes are rising and their spending increases, so too does the demand for imports. In micro terms, there is a high income elasticity of demand for imported products. And unless there is a corresponding increase in UK exports overseas, then the balance of trade in goods and services will move towards heavier deficit. This has been the case in the UK over the last five or six years although the downturn in household spending in 2009 is leading to a steep fall in the volume of imports.

In the medium term if demand for imports rises and the level of import penetration into the domestic economy continues to rise, then national output and employment will weaken and this will work its way through the circular flow to reduce real incomes. Living standards are reduced in the long run if our export industries are unable to compete with output produced in other countries