2.1.4 Consequences of a Current Account Deficit on the BoP Flashcards
1
Q
what are the three consequences of a deficit
A
- inflationary pressure
- slow economic growth
- worsening unemployment
2
Q
how does a current account deficit cause pound to depreciate
A
- a large deficit can put pressure on the pound to depreciate
- this is because there will be less demand from overseas consumers/firms/investors for the pound
- therefore the currency weakens
3
Q
how does depreciating pound cause inflationary pressures
A
- imports become more expensive for firms, which then contributes towards cost-push inflationary pressures and falling real incomes. - May also see demand pull inflation as exports cheaper, increasing net exports and AD
4
Q
how does a current account deficit cause slow economic growth
A
- a deficit represents a net outflow of income from the UK’s circular flow
- this is because there are increased imports and decreased demand for exports, so greater withdrawals and lower injections
- this leads to reduced net exports and AD
- therefore actual growth falls
5
Q
how does a current account deficit cause worsening unemployment
A
- net outflow of income from circular flow (slow economic growth)
- increased imports, decreased demand for exports, so greater withdrawals and lower injections
- reduced net exports and AD
- therefore actual growth falls
- therefore there is less derived demand for labour as less output is needed due to lower AD
6
Q
in which industries does worsening unemployment particularly apply
A
exporting industries
7
Q
when is a country not concerned about a current account deficit
A
- if the deficit arrives from an excess of imported materials that will be converted into products that are then exported
- may indicate higher average incomes/living standards as importing more consumer durables
- may reduce demand-pull inflationary pressure (reduced (X-M))
8
Q
what does the impact of a current account deficit depend on
A
- how long the deficit lasts
- how large the deficit is
