4.1 - Current Account Flashcards
What does the current account consist of?
Trade balance in goods
Trade balance in services
Primary income
Secondary income
What does primary income consist of?
Uk earnings from direct investment, shares, bonds
FDI profits, interest + dividends
What does secondary income consist of?
General government transfers
Overseas aid
Debt relief
What are the general causes of a current account deficit?
Overvalued exchange rates
High consumer spending
Unbalanced economy
Competitiveness
How does an overvalued exchange rate result in a current account deficit?
Exports expensive, imports cheap
Encourages domestic consumers to import
Exporters face stiff competition
How does high consumption result in a current account deficit?
Tends to result in increased imports
Imports satisfy AD
How does an unbalanced economy result in a current account deficit?
Focus on spending rather than investment
Spending favours imports
How does competitiveness result in a current account deficit?
Decline in relative competitiveness tends to result in output quality deterioration
Export demand falls
What characterises a current account deficit?
Imports > Exports
Which policies are usually implemented to reduce the deficit?
Devaluation of exchange rate
Supply side policy to improve competitiveness
Cut consumer spending
How is consumer spending reduced?
Tight fiscal + monetary policy
Tax + IR
Austerity
What must be done to the capital account during a current account deficit?
Must run in surplus
Used to balance each other out
How does a low saving rate affect the current account?
Encourages consumption
Trade balance in goods worsens
Deficit grows
Which factors have the largest influence on the current account?
Exchange rates
AD
Inflation
Labour productivity
Innovation
How do exchange rates affect the current account?
Strong currency, more imports, deficit
Weak currency, export more, reduced deficit
