2.1.4 Flashcards
1
Q
What is a current account deficit?
A
This is when a country imports more goods, services and capital than it exports. This can indeed lead to a negative balance of trade.
2
Q
How do exchange rates impact a country’s current account balance?
A
- Increasing exchange rates: Leads to an increase in prices of exports which leads to reduced volumes of exports. The opposite is said for imports.
-Decrease in exchange rates: Leads to a decrease in prices of exports which leads to increased volumes of exports. The opposite is said for imports.
3
Q
How does inflation affect a country’s account balance?
A
- Increased inflation: Increased price levels of goods and services will lead to more expensive exports, this leads to less exports. The opposite is said for imports.
- Decreased inflation (Deflation): Decreased price levels of goods and services will lead to cheaper exports, this leads to more exports. The opposite is said for imports.
4
Q
How does a change in currency affect a country’s current account balance?
A
Appreciation leads to less exports and more expensive exports.
Depreciations leads to cheaper exports and more exports.
