13. Economic Performance - Budget Deficit, Causes & Consequences Flashcards
What are the demand-side reasons for a current account deficit?
Strong domestic growthRecession overseasA strong exchange rate
How does strong domestic growth cause the current account deficit?
Incomes high, living standards high, people richer want to spend more, buy more imports – budget deficit
How does the recession overseas cause a budget deficit?
This will cause the demand for exports to fall so our net flows of money into the country will be reduced causing a budget deficit.
How did the strong exchange rate cause the budget deficit?
SPICEDStrong pound imports cheaper exports direImport would come cheaper so we will buy more where as experts will become more expensive so less people will buy them from abroad creating a budget deficit.
What are the supply-side causes of a current account deficit?
Low investmentLow ProductivityHigh Relative inflationHigh unit labour costsPoor quality of goods madeDepletion of resourcesAll things making the UK exports less competitive
Which of the two causes can be more disruptive and why?
Supply side causes are generally more disruptive because these are more likely to be long-term issues.
What are the consequences of a current account deficit?
A current account deficit means that exports are less than imports so aggregate demand is also falling. As aggregate demand falls output of the economy decreases so employment is likely to suffer but you will reduce demand pull inflation.
What are the possible evaluation points for the causes and consequences of a current account deficit?
What percentage of the countries real GDP is the deficit – if the deficit is a tiny percentage is not significant.If the deficit is caused by strong growing economy surely this is a positive thing.What is the deficit is being caused by the transfers or incomes section of the current account what impact will this have?
