Importance of balance of payments on the current account

Question 1

Why is a current account deficit concerning?

Answer 1

• reflects the falling demand for domestic goods which is linked to increased unemployment → less income tax revenue → higher benefit payments for the government
• increases the debt of a country
• if its due to a low productivity it will take longer to change

Question 2

Why is a deficit it not that concerning?

Answer 2

• temporary eg importing
  raw materials for manufacture→ eventually
  exported →increases economic growth
• reduces inflation within domestic economy as imports> exports → decreases total demand→ reduces upward pressure on price
• falling exchange rate over time → increased competitiveness of the UKgoods and
  so Increases exports
• smalI percentage of GDP

Question 3

Why is current account surplus not concerning?

Answer 3

• reflects more demand for domestic goods → decreased unemployment higher tax revenue
• decreases debt of country- more money in > out

Question 4

Why is current account surplus concerning?

Answer 4

• rising inflation in domestic economy exports> imports
• Hides the causes that have a negative impact on global economic growth such as protection policies
• Over time it may lead to a rise in the exchange rate which can decrease the International competitiveness of UK goods.