BoP: Supply-side Policies and the Current Account Deficit Flashcards
What does the current account measure?
Trade in goods and services, income from abroad, and transfers
What occurs during a current account deficit?
A country imports more than it exports
What are supply-side policies aimed at improving?
The productive capacity of an economy
Why are supply-side policies critical?
They address long-term structural issues, such as reducing a persistent current account deficit
How do supply-side policies help reduce a current account deficit?
By improving the price and quality competitiveness of exports
What is price competitiveness?
The ability to sell goods at lower prices compared to competitors
How do low exchange rates impact exports?
They make exports cheaper for foreign buyers, increasing demand
What is the effect of low interest rates on export-oriented industries?
Encourages borrowing and investment, increasing production for sale abroad
Why is controlled inflation important for price competitiveness?
It ensures domestic goods remain affordable
What is quality competitiveness?
The ability to compete based on the quality of goods and services
What factors contribute to quality competitiveness?
- Innovation in product design and technology
- Improvements in manufacturing excellence
- Research & Development (R&D)
- Strategic marketing
Fill in the blank: Supply-side policies focus on improving the _______ and quality competitiveness of exports.
price
True or False: Innovation is essential for fostering improvements in export quality.
True
What role does strategic marketing play in exports?
Helps them stand out in competitive global markets
What is the government’s role in infrastructure development?
The government should invest in physical infrastructure, like transport, telecommunications, and energy, to enhance the efficiency of industries.
This investment helps create a foundation for economic growth.
What are regulatory reforms in the context of supply-side policies?
Deregulation can encourage businesses to innovate and become more competitive, including reducing trade barriers or streamlining business regulations.
These reforms aim to create a more favorable business environment.
How can the government encourage private sector investment?
By implementing policies that incentivise private-sector investment in R&D and improving productivity through training and education.
This enhances the long-term competitiveness of the economy.
What is the effect of effective supply-side policies on Long-run Aggregate Supply (LRAS)?
They lead to an outward shift in the LRAS curve, representing an increase in the economy’s potential output.
This indicates that the economy can produce more goods and services.
What is an example of how supply-side policies can increase productivity?
Increased productivity from improved technology or education allows more goods and services to be produced without inflating prices.
This enhances efficiency and competitiveness.
What is the impact of supply-side policies on domestic reliance on imports?
They help reduce reliance on imports as the domestic economy becomes more self-sufficient and competitive.
This can improve the trade balance.
What is the relationship between supply-side policies and Short-run Aggregate Supply (SRAS)?
Supply-side policies can shift the SRAS curve right, reflecting improved production efficiency and lower costs for businesses.
This boosts export capacity.
How does an increase in exports affect Aggregate Demand (AD)?
As exports increase, demand for domestic goods rises, shifting the AD curve rightward.
This can lead to higher national income and greater economic growth.
What happens to the equilibrium after implementing supply-side policies?
The new equilibrium is at higher output (Y₁) with moderate price inflation (P₁).
This reflects the overall impact of LRAS, SRAS, and AD shifts.
Fill in the blank: Effective supply-side policies improve the economy’s _______.
[potential output]
True or False: Supply-side policies only affect Long-run Aggregate Supply (LRAS).
False
They also influence Short-run Aggregate Supply (SRAS) and Aggregate Demand (AD).
What is a key critique of supply-side policies regarding their effectiveness over time?
Supply-side policies take time to produce results
For example, improving productivity through education or infrastructure development may take years to manifest in increased exports or reduced imports.
What immediate interventions may be necessary to address persistent current account deficits?
Devaluation and direct controls
These interventions can provide quick adjustments in the short term.
How may supply-side policies potentially increase inequality?
Tax cuts for corporations or deregulation may disproportionately benefit higher-income individuals or large firms
This exacerbates income inequality and could lead to social and economic challenges.
What social consequence can arise from increased income inequality due to supply-side policies?
Undermining public support for these policies
As wealth distribution becomes more uneven, social tensions may increase.
What budgetary concern arises from implementing supply-side reforms?
Increased government spending, larger budget deficits, and rising public debt
These concerns could raise issues about fiscal sustainability.
Fill in the blank: Supply-side policies may require significant public investment in _______.
infrastructure, education, and R&D
This investment is often necessary for these policies to be effective.
What is the need for a comprehensive strategy in addressing a current account deficit?
To consider supply-side policies alongside demand-side factors, social equity, environmental sustainability, and fiscal responsibility
A comprehensive strategy ensures that all relevant aspects of the economy are addressed.
What are demand-side factors that influence consumption and investment?
Fiscal and monetary policies
These policies can stimulate or dampen economic activity, impacting the current account.
Why is addressing social equity important in economic reform?
To ensure broad-based support for reform
Inequality can lead to social unrest and hinder economic progress.
What does environmental sustainability ensure in economic growth?
That growth is environmentally responsible
Sustainable practices help protect resources for future generations.
What is the significance of fiscal responsibility in government spending?
To avoid excessive public debt
Managing debt levels is critical for long-term economic stability.
What is a long-term strategy for reducing a current account deficit?
A multi-faceted approach that includes supply-side policies and macroeconomic strategies
This ensures that all angles of the economy are considered.
What is the focus on competitiveness in relation to exports?
Building quality-competitive exports through innovation, R&D, and strategic marketing
This reduces reliance on imports and improves the current account balance.
Why is the sustainability of policies important?
To ensure they contribute to long-term growth without exacerbating inequality or fiscal instability
Sustainable policies maintain a healthy economy over time.
What is a current account deficit?
Occurs when a country imports more than it exports, leading to a negative balance of trade
A persistent deficit can indicate economic weaknesses.
Define supply-side policies.
Policies designed to improve the efficiency and productivity of an economy’s factors of production
These policies aim to increase economic output.
What does Long-run Aggregate Supply (LRAS) represent?
The total output of an economy when all resources are fully employed
LRAS reflects the economy’s potential output.
What is Short-run Aggregate Supply (SRAS)?
The total output of an economy in the short run, influenced by changes in production costs
SRAS can fluctuate based on immediate economic conditions.
What is price competitiveness?
The ability of a country’s goods and services to compete based on their price relative to other nations
Price competitiveness affects export performance.
What is quality competitiveness?
The ability of a country’s goods and services to compete based on their quality, innovation, and design
Quality can often allow products to command higher prices.
