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Discuss the impact of an increase in the value of the pound on the British current account.

I’d start by using the acronym SPICED (Strong Pound Imports Cheap Exports Dear). If you have an increase in the value of the pound you can buy more of another currency with £1. This implies that the pound has become stronger. If the pound is strong we know that imports have become cheaper and exports have become more expensive. The current account is determined using the equation Current Account=X-M. Where X and M refer to exports and imports respectively. In the case of a strengthening pound we see M rise, as imports are cheaper and so more will be consumed, and X fall, as exports are more expensive thus the demand for them will fall. This is going to to cause a deterioration in the current account, which would be the impact of an increase in the value of the pound.However, now we see a large flow of money out of the economy, with people buying foreign currency in order to consumer foreign products, as well as no one buying the pound as there is less interest in British exports. We could now see a deterioration in the value of the pound, as there is low demand and high supply thus leading to positive contribution to the current account in the future.



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