| Updated: September 12, 2025Profile of the United Kingdom’s pound – overview of the economy
This lesson will cover the following
- A look at the UK economy
- The case for adopting the euro
- Monetary policy authority – Bank of England
Economic overview
In 2013 the United Kingdom was the world’s sixth-largest economy, with a nominal GDP of $2.54 trillion, and the eighth-largest when measured by purchasing power parity (PPP) at $2.39 trillion, according to the International Monetary Fund. The nation’s nominal GDP per capita ranked 23rd ($39,567 in 2013), while its GDP per capita measured by PPP was 22nd ($37,307 in 2013). In 2012 the country had the third-largest stock of received foreign direct investment ($1.321 trillion, according to the CIA World Factbook) and the second-largest stock of foreign direct investment abroad ($1.808 trillion).
The United Kingdom’s economy is service-oriented, with the services sector accounting for about 77.8% of GDP as of the first quarter of 2014. The nation’s financial services industry added a gross value of £116,363 million to the economy in 2011, according to the 2013 Blue Book report. The City of London is renowned as one of the three command centres of the international economy, alongside New York and Tokyo.
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London is a leading centre for industries such as banking (more than 500 banks have offices in the UK’s capital), insurance, foreign exchange and energy futures trading.
The United Kingdom is among the largest producers and exporters of natural gas in the European Union. Within Europe it is the second-largest oil and gas producer after Norway. In 2008 the country produced 549 billion barrels of oil and 68 billion cubic metres of natural gas, meeting more than three-quarters of the UK’s primary energy demand for oil and gas. In 2010 it produced 60% of the gas it consumed. As energy production comprises over 10% of GDP, any increase in energy prices boosts opportunities for the UK’s oil-exporting companies. The country was a net oil importer for a short period in 2003 because of disruptions in the North Sea but has since regained its status as a net exporter of oil.
The UK’s manufacturing sector added a gross value of £140,539 million to the economy in 2011, employing 2.6 million people. The mining industry, in turn, added £31,380 million during the same period.
Regarding international trade, the seasonally adjusted deficit on the UK’s trade balance narrowed to £1.3 billion in March 2014, according to the Office for National Statistics, from £1.7 billion the previous month. In 2013 exports totalled $503.6 billion, while imports were $529.5 billion.
According to Statista, in 2012 the United Kingdom’s largest export partners were Germany (11.3% of total exports), the United States (10.5%), the Netherlands (8.8%), France (7.4%) and Ireland (6.2%).
In the same year, the nation’s largest import partners were Germany (12.5% of total imports), China (8.2%), the Netherlands (7.1%), the United States (7.0%) and France (5.7%).
The case for adopting the euro
The United Kingdom refused to adopt the euro in June 2003. Had the country joined the European Monetary Union (EMU), it would have faced considerable economic consequences. Interest rates in the UK would need to align with those in the Eurozone. As UK policymakers are highly concerned with voter approval, an EMU entry is unlikely if a referendum does not favour adopting the euro. Opinions both for and against the single currency have been voiced.
Those who supported the idea offered the following arguments:
First, it would reduce exchange-rate uncertainty for UK businesses by lowering transaction costs and risks;
Second, a common currency is associated with increased price transparency;
Third, the European Central Bank’s commitment to low inflation would lower long-term interest rates and spur growth;
Fourth, the euro is the world’s second most important reserve currency after the US dollar;
Fifth, integrated financial markets within the European Union would allow capital to be allocated more efficiently across Europe.
Those who opposed the idea presented these arguments:
First, currency unions have not been particularly stable in the past;
Second, strict EMU criteria are imposed by the Stability and Growth Pact;
Third, disturbances in one member’s economic or political system could affect the common currency and harm sound economies;
Fourth, joining the EMU would transfer local monetary authority to the European Central Bank (ECB), and concerns remain over which nations might dominate the Bank;
Fifth, belonging to a currency union that lacks monetary flexibility would require the United Kingdom to have more flexible housing and labour markets.
Monetary policy authority – Bank of England
Founded in 1694, the Bank of England’s main objective is to maintain monetary (stable prices and confidence in the national currency) and financial stability. Stable prices are determined by the central bank’s inflation objective, which it seeks to meet through decisions made by the Monetary Policy Committee (MPC). The Committee sets the benchmark interest rate that, in its view, will achieve the inflation target. The Committee comprises nine members: one Governor, three Deputy Governors, the Bank’s Chief Economist, one Executive Director for Markets and four external members appointed by the Chancellor. The MPC’s decisions are taken on a ‘one person – one vote’ basis rather than by consensus. The CPI inflation target is set at 2%.
The MPC meets every month, and its decisions are closely watched by market participants for changes in monetary policy, including the base rate (repo rate). The Committee publishes a statement after each meeting and releases a quarterly Inflation Report, which provides detailed information on the Bank’s forecasts for growth and inflation over the next two years.
The BoE also publishes its Quarterly Bulletin, which reviews past monetary policy decisions and offers insight into international economic conditions and their influence on the United Kingdom’s economy.
The Bank of England uses two main policy tools – the repo rate and open market operations. The repo rate is the interest rate at which the BoE lends to financial institutions. It influences a wide range of rates set by commercial banks and other institutions for their savers and borrowers. The repo rate also affects the prices of financial assets (bonds and stocks) and the exchange rate, which in turn influence consumer and business demand. Adjusting the repo rate therefore impacts spending and output in the UK. Raising borrowing costs is intended to curb high inflation, while lowering them aims to stimulate economic growth (saving becomes less attractive and borrowing more attractive, thereby increasing the willingness to spend).
We discuss open market operations in detail in our Forex trading guide.