What Causes a Current Account deficit
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A current account deficit on the Balance of Payments means that the value of
imports for goods and services is greater than the value of exports. The US
currently has a very large current account deficit, roughly between 6-7% of GDP.
This deficit threatens to cause a significant devaluation in the US dollar. This
essay looks at the causes of a balance of payments deficit.
Fixed Exchange Rate
If the currency is overvalued, imports will be cheaper and therefore there
will be a higher Q of imports. Exports will become uncompetitive and therefore
there will be a fall in the Quantity of exports.
If there is an increase in AD and National Income increases, people will have
more disposable income to consume goods. If domestic producers can not meet the
domestic AD, consumers will have to imports goods from abroad. In the UK we have
a high Marginal propensity to imports mpm because we do not have a comparative
advantage in the production of manufactured goods. Therefore if there is fast
economic growth there tends to be a big increase in imports.
Decline in Competitiveness.
IN the UK there has been a decline in the exporting manufacturing sector,
because it has struggled to compete with developing countries in the far east.
This has led to a persistent deficit in the balance of trade.
This makes exports less competitive and imports more competitive. However
this factor may be offset by a decline in the value of sterling.
Recession in other countries.
If the UK’s main trading partners experience negative economic growth then
they will buy less of our exports, worsening the current account.
If countries are borrowing money to invest e.g third world countries
In the US the main reason for a current account deficit is the high marginal
propensity to consume of American consumers. This has been encouraged by
relatively low interest rates, cuts in income tax for the wealthy and rising
house prices. The recent fall in US house prices and therefore consumer spending
may result in a lower deficit.
About the Author
Richard Pettinger studied Politics and Economics at Lady Margaret Hall,
Oxford University. He now works as an economics teacher in Oxford. He enjoys
writing essays on Economic and he edits an Economics Blog focused on UK and US
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Article Published/Sorted/Amended on Scopulus 2007-03-17 00:04:23 in Economic Articles