2.1.4 Causes of a Trade Deficit on Current Account on BoP

Question 1

how does an appreciation of the currency cause a current account deficit

Answer 1

• stronger currency means imports are cheaper and exports are relatively more expensive
• lower demand for exports and more demand for imports
• worsens trade balance and current account deficit

Question 2

how does the UK experiencing economic growth cause a current account deficit

Answer 2

• UK consumer incomes rise and demand increases
• could increase demand for imports in the UK (consumers have a high propensity to import)
• lowers trade balance and current account deficit

Question 3

how does UK membership of the EU cause a current account deficit

Answer 3

• fees are paid for membership of the EU
• increased transfer payments
• worsens current account deficit

Question 4

how does UK becoming more competitive lower the current account deficit

Answer 4

• perhaps due to lower inflation or if there is economic growth in export markets
• demand for exports should increase, improving trade balance
• could cause current account deficit to improve

Question 5

how does UK experiencing deindustrialisation cause a current account deficit

Answer 5

• in UK, manufacturing sector has been declining since the 1970’s
• the goods that the UK previously made domestically now have to be imported
• worsens the current account deficit

Question 6

Give reasons for a larger UK trade deficit in 2022/23

Answer 6

• export growth has weakened (non-tariff barriers post Brexit)
• higher global prices for essential imports
• currency weakness (increases prices of imports whereas exports take time to respond