Current Account Deficit

Question 1

How can you reduce the current account deficit via protectionism

Answer 1

Barriers to trade reduce imports Expenditure reducing policy

Question 2

How can you reduce the current account deficit via deflationary fiscal policy

Answer 2

Causes reduction in disposable income –> reduction of imports Disinflation also makes exports more competitive and imports more expensive

Question 3

How can you reduce the current account deficit via supply side policies

Answer 3

Improves potential growth –> increases productivity –> greater competition –> lower costs Also reduces inflation

Question 4

How can you reduce the current account deficit via the currency

Answer 4

Devalue Makes exports cost less and imports more BUT PEDx + PEDm > 1

Question 5

What is the J-Curve effect

Answer 5

A depreciation will make the deficit worse in the short run

Marshall Lerner condition not met

Short run –> PEDm inelastic so increase in the price of imports increases total expenditure

Long run –> exporters and importers adjust so M-L condition is met

Question 6

Why is PEDx inelastic in the short run

Answer 6

Firms are tied in with supply contracts

Exporters haven’t got the spare capacity or stocks to satisfy extra demand in short run so have to import them from suppliers

Information failure in the short run –> firms are not always aware of price changes