[thorn0123]

If real GDP increases then that means that inflation will increase in Britain and that people will consume more and buy more imports therefore making the balance of payments worse. However could you argue that if real GDP increases the employment is up, therefore firms would be exporting more goods and services and therefore the current account gets better? If anyone could clear the link between real GDP and the balance of payments for me then it'd be great, thanks.

[Aeonstorm]

There's no real 'clear' link between real GDP and the BOP. Only a ton of different interacting forces, with a combination of some winning out over a combination of others. As long as your argument is logical, it is right. It just might be counteracted by another even greater force.

Thus you really need to know why real GDP has risen, not just that it had. If it was completely due to increasing exports, than clearly BOGS (balance of goods + services) would improve. But if it was completely due to domestic demand, clearly BOGS would deteriorate.

Also remember that the accounts are usually measured in terms of percentage of GDP. Thus if real GDP increased and thus people consumed more imports, it may be that that BOGS is exactly the same because the worsening in net value has been exactly matched by the increase in GDP.

You can also incorporate policy response and investor confidence if real GDP increases, and so on and so forth. I don't know the situation in Britain very well, but who knows, interest rates might rise and appreciate the pound due to carry trade. This is all getting very speculative though :P

[usycool1]

Hmmm...I think the thing is that with a higher rate of inflation, our exports will also seem to be more expensive to foreign countries. This will mean that out exports will become less competitive, so less foreign consumers will buy our exports. I don't think that the current account on the balance of payments will therefore get better by a significant amount.

I could be wrong though as I'm only doing GCSE atm and I've just learnt about the Balance of Payments, so if I'm wrong, feel free to correct me anyone

[Aeonstorm]

(Original post by usycool1)
Hmmm...I think the thing is that with a higher rate of inflation, our exports will also seem to be more expensive to foreign countries. This will mean that out exports will become less competitive, so less foreign consumers will buy our exports. I don't think that the current account on the balance of payments will therefore get better by a significant amount.

I could be wrong though as I'm only doing GCSE atm and I've just learnt about the Balance of Payments, so if I'm wrong, feel free to correct me anyone

The reasoning is correct, but in reality, wouldn't the central bank act to prevent inflation from rising? iirc, Britain aims for 2% inflation right?

[usycool1]

(Original post by Aeonstorm)
The reasoning is correct, but in reality, wouldn't the central bank act to prevent inflation from rising? iirc, Britain aims for 2% inflation right?

Yep, Britain does aim for 2% inflation Yeah, you're right, in reality, the Bank Of England probably would react to prevent inflation from rising.

[MagicNMedicine]

Why would inflation rise if real GDP is rising?

Inflation will only rise if aggregate demand is rising at a rate that is outstripping aggregate supply (ie too many goods being demanded and not enough capacity to produce them), or over a longer timescale, if the increase in money growth outstrips the rate of GDP growth.

If aggregate supply is increasing and money growth is being kept under control then you can have real GDP rising whilst inflation is falling or kept steady at low rates, this was the situation in the UK from about 1995-2007.