4.1.7 Meausres To Reduce A Country’s Imbalance On The Current Account

Question 1

Policies to reduce a current account deficit?

Answer 1

• deflationary policies to reduce AD
• depreciation of the currency
• supply side improvements
• protectionism

Question 2

What are expenditure-switching policies? And examples?

Answer 2

Policies designed to change the relative prices of export and imports - switch expenditure away from imports and towards domestic consumption/exports

EG: tariffs, depreciation of the currency

Question 3

What are expenditure reducing policies?

Answer 3

Contractionary monetary and fiscal policies designed to lower real income and AD = cut demand for imports

EG: - high direct taxes
- cuts in gov spending on welfare
- cuts on gov spending on public services
- increase interest rates

Question 4

Will a deprecation/ devaluation improve the trade deficit?

Answer 4

• according to the Marshall Lerner conditions, the absolute value of the sum of the PED for exports + PED for imports must be greater than or equal to 1 for a depreciation to improve the current account