the causes of a deficit on the current account of the balance of payments

Question 1

what can cause a current account of the balance of payments deficit?

Answer 1

demand side and supply side factors can cause a current account deficit

Question 2

what are examples of demand side factors that cause a current account deficit

Answer 2

demand side factors that cause a current account deficit:

• strong domestic growth
• recession overseas
• a strong exchange rate

Question 3

how does a strong domestic growth cause a current account deficit?

Answer 3

a strong domestic growth causes a current account deficit because incomes and the standard of living are higher, so consumers are more willing to buy imports (an outflow of money)

Question 4

how does a recession overseas cause a current account deficit?

Answer 4

a recession overseas causes a current account deficit because incomes abroad are falling causing the demand for exports to decrease.
as a result, the revenue generated from exports falls

Question 5

how does a strong exchange rate cause a current account deficit?

Answer 5

a strong exchange rate causes a current account deficit because SPICED
- imports are cheaper, so imports rise
- exports are dearer, so exports fall
as a result, there are more outflows than inflows of money into a country

Question 6

what are examples of supply-side factors that cause a current account deficit?

Answer 6

examples of supply side factors that cause a current account deficit are: