Most developing countries have experienced continuous current account deficits since the early 1980s. What do you...

Most developing countries have experienced continuous current account deficits since the early 1980s. What do you think are the main causes for the deficits? What would be the consequences of continuous current account deficits? Discuss the options for financing a typical balance of payments deficit.

Solutions

Expert Solution

A current account deficit occurs if value of imports exceed the value of exports.most of the developing countries have experienced continuous current account deficits since the 1980s. Following are the reasons for that.

* Economic growth.

The developing countries on the path of Economic growth.with the increase in national income, disposable income will also be high which creates a rise in aggregate demand. When dmestic producers aren't able to meet the high demand , it leads to an increase in imports .

* Higher inflation

Inflation makes exports less competitive and imports more competitive.

* Overvalued exchange rate

Overvalued exchange rate undermines export profitability and makes imports look cheaper.

* Low invest in export sectors

As a result export Industries find it difficult to stand cut throat competition

* Inability to meet domestic demand

Developing countries also suffer from the absence of proper and efficient Industries to meet their own demand for commodities

> current deficit won't be a serious issue in short run .But prolonged current account deficits will have the following consequences

* It will lead to depreciation in exchange rate and cost push inflation.

* It will be considered as a sign of unbalanced and uncompetitive economy

* If financed through borrowing , countries will be burdened with high interest payments.

* Foreign dependence will increase and the country will end up losing its independence.

Following methods can be adopted to deal with a typical balance of payment deficit

*If the country is a member of organizations like International monetary fund, it may borrow money in foreign currencies.

* The country can also seek help from other foreign nations.

*In order to correct balance of payment deficit , the country can introduce trade policy measures expanding exports and reducing imports

* The country should also adopt monetary and fiscal policies that aim at reducing aggregate Expenditure in the Economy.( Tight monetary policy and contractionary fiscal policy)

* Introduction of Expenditure switching policies will lower the price of Exports which will encourage the exports of a country.

*There is another method called exchange control . Exchange controls are government imposed restrictions on the movement of currency between countries.

Maintaining a good balance of payment position is necessary because balance of payment of a country reveals it's financial and economic status.

Rahul Sunny answered 1 week ago

Next > < Previous

Related Solutions

Why did most countries of Latin America fall into a debt crisis in the early 1980s?...

Why did most countries of Latin America fall into a debt crisis in the early 1980s? Discuss the general problem of a “debt trap” and national dollar capital inflows and outflows. Then discuss 2 general trends of the 1970s and 2 specific trigger events of the 1980s which caused the crisis.

Turkish economy has struggled with current account deficits since the 2000s. However, although current account balance...

Turkish economy has struggled with current account deficits since the 2000s. However, although current account balance had a deficit, an adjustment in current account balance was observed in years 2002, 2009 and 2018. Discuss what type of automatic mechanisms and adjustment policies might have contributed to this adjustment. Explain clearly by being specific about the type of the mechanism and policy for each year.

19. The United States has experienced persistent current account deficits, reflecting the fact that ___________. A)...

19. The United States has experienced persistent current account deficits, reflecting the fact that ___________. A) this country’s national saving is more than its domestic investment B) this country’s domestic absorption exceeds its GNP C) this country’s economic growth has been slow D) this country’s unemployment rate has been too high. 23. If a country runs a financial account surplus, it means that __________________________. A) this country’s asset imports exceed its asset exports B) this country’s international debt accumulates C)...

Explain why economies with financial account surpluses usually have current account deficits.

Research the top three countries with highest growth rate. Why do you think developing countries have...

Research the top three countries with highest growth rate. Why do you think developing countries have a higher growth rate compared to industrialized countries?

Countries with a current account deficit will typically have a. A financial and capital account surplus...

Countries with a current account deficit will typically have a. A financial and capital account surplus to offset the current account deficit b. A balance of payment imbalance c. A lower level of net omissions and errors d. A higher level of net omissions and errors e. A financial and capital account deficit What was the result of The Smoot-Hawley Tariff Act of 1933? a. The volume of trade between the US and European countries increased b. Had no impact...

DO THE CONCEPT OF DUALISM ADEQUATELY POTRAYS THE DEVELOPMENT PICTURE IN MOST DEVELOPING COUNTRIES , AND...

DO THE CONCEPT OF DUALISM ADEQUATELY POTRAYS THE DEVELOPMENT PICTURE IN MOST DEVELOPING COUNTRIES , AND WHAT IS THE MEANING OF DUALISM AND DUAL SOCEITIES

5. When the economy was experiencing high inflation in early 1980s, what di the Fed do...

5. When the economy was experiencing high inflation in early 1980s, what di the Fed do to help slow down the high inflation? Explain how the Fed’s action would affect short-term rates and long-term rates of Treasury securities, and thus a possible yield curve resulting from it. What would be the likely impact of the Fed’s actions on the yield curves of U.S. Treasury and corporate bonds?

Oil prices have gone down significantly since the start of this year. Most of the developing...

Oil prices have gone down significantly since the start of this year. Most of the developing markets that rely on imported oil can benefit from low oil import bill due to unprecedented decrease in oil prices. Question: How it would affect the currency exchange rates, inflation and interest rates in developing economies? Provide the reasons for your answer as well.

What are the dangers to a nation from running persistently large current account deficits. Is Australia...

What are the dangers to a nation from running persistently large current account deficits. Is Australia in danger of being in this position? What are the main factors contributing to Australia’s current account deficit?

Subjects