Role of trade
Trade plays a critical role in the economy. Trade allows a country to specialise in producing and exporting goods and services where it has a comparative advantage, which enables it to import other goods and services that it produces less efficiently. International goods and services exports accounted for 31% of UK gross domestic product (‘GDP’) in 2018.
The government estimated that exports supported 6.5 million jobs in the UK in 2016. Around 58% (3.8 million) of these jobs were in exporting industries and 42% (2.7 million) were in the UK supply chain of exporting industries. Specialisation also raises productivity, which leads to higher real incomes. The government report found that roles linked to exports were 21% more productive and 7% higher paying than other equivalent roles.
Imports are also critical: they serve the needs of UK consumers such as for food, electronics, technology, and medicines. Importantly, most imports are destined for producers, not consumers. This matters for the economy because imports and exports are often interlinked in supply chains.
Goods and services are also interlinked. Manufacturers use services in the production of goods, and goods traders often trade services. For example, about 30% of firms that export goods also export services.
Before Brexit, more than half of the UK’s imports from the EU – such as raw materials, auto components, chemicals, and business services – were intermediate goods and services or inputs to the production of finished goods and services, many for export. In the other direction, 70% of UK exports to the EU were intermediate goods and services for use by companies rather than consumers. For UK trade with non-EU countries, around 60% of both imports and exports were intermediate goods and services.
See the section on trade for detailed analysis of UK trade statistics.
Components of GDP
The other main components of GDP expenditure are household spending, government spending and investment. Figure 4.14 shows the breakdown for 2018 (from ONS), the last stable year of trade patterns before preparations for the UK’s EU exit, and, then, Covid disrupted them. Please see the section on investment for trends in business investment and foreign direct investment.
Economists typically use Q4 2019 as a pre-pandemic reference point, but we use 2018 as our pre-Brexit reference point because ONS regards it as the last year before Brexit began to disrupt trade patterns significantly.
Household spending was 65% of GDP followed by government spending (18% of GDP) and investment, shorthand for ‘Gross Fixed Capital Formation’, (18% of GDP) and a key driver of future prosperity. Trade expenditure is measured as exports minus imports, which results in the trade balance – a small net figure (-1% of GDP). Note that GDP statistics usually exclude inflation because it does not create value: the preferred measure is ‘real GDP’. (Figures below are in 2019 prices and as reported by ONS in February 2022, so there may have been some subsequent revisions.)
Figure 4.14: Components of GDP expenditure
‘Trade openness’ is an important complementary indicator which measures all trade (exports plus imports of goods and services) as a proportion of GDP. It indicates the openness of an economy and its depth of integration with the global economy. The UK’s trade openness was 62% in 2018, above the global average of 57%.
‘Trade intensity’ is another important trade indicator. It expresses exports of goods and services as a percentage of GDP – a measure of the success of ‘global Britain’. In 2018, UK trade intensity was 31%, just above the OECD average of 30%.