Question 2 (case study question Does the Balance of Payments Matter ? The UK balance of payments on current account stood at - f18,965 billion in 2002 . Figures suggested that this might get worse by the end of 2003 as the trade deficit widened to f4.8 billion during September Factors contributing to the figures included increased imports of cars and oil coupled with reduced exports of North Sea oil, consumer intermediate and semi -manufactured goods . The weaker export figures highlight the problems that manufacturers continue to face in competing with firms from other countries whilst the concern over the growing debt mountain in the UK helps to fuel the import figures As is normally expected , there was a surplus on the trade in services of 10.9 billion leaving the overall trade balance for the month at -f3.9 billion . The exchange rate is an important factor in trade ; the value of sterling (GBP ) against both the Euro and the $ (US Dollar ) rose during October - around $1.66 to the pound to nearly $1.70 and 1.41 to the pound to 1.46 . The value against the dollar has dropped sharply in the first two weeks of November and is back down to the $1.67 mark . Such changes may not seem very much but for traders dealing in millions of pounds this can make a significant difference Does the balance of payments matter ? Some would argue that what matters are what we are buying selling as this can have an effect on our future productivity . If, for example , we are buying capital equipment , this could be used for future production and as such could be seen as investment and not be a cause for concern whereas if we are buying finished consumer goods this could present more of a problem Other concerns relate to the link between the balance of payments and the exchange rate . If we continue to run a deficit then pressure on the pound to fall will continue and this could impact on inflation all of which may lead the Bank of England to be more likely to repeat the increase in interest rates that was witnessed during November . On the other hand , foreign exchange dealers might look at the fall in manufacturing and feel that the Bank of England are unlikely to make matters worse by pushing up rates too far and as a result decide to sell pounds to put funds in economies where interest rates are more attractive Adapted from : Mind your Business - 17 November 2003 "The Balance of Payments , Exchange Rates , Elasticity and Inflation ", Available from : Required : (a) Define the following terms : (i) Balance of Payment (2 marks ) (ii ) Trade deficit (2 marks )