Question

Discuss policies that the U.S. could pursue to balance its high current account deficit. Also, discuss potential international factors that may help mitigate the current account deficit.

Answer 1

Devaluation- This means the currency's value against others is popular. (e.g. selling pounds will cause the value of the pound to fall) If the currency is devalued, the price of the manufactured goods decreases and thus the amount demanded of the imported goods rises.
Exports will get cheaper, and the quantity of exports will increase.
And, if demand is fairly price elastic, we would expect a devaluation to lead to an increase in (X-M) and therefore the current balance of payments account.
That does, however, rely on the elasticity of export and import demand.

Monetary policy- Strict monetary policy means higher interest rates. Higher interest rates would boost debt and mortgage servicing costs, and allow people to spend less money. This would also reduce their import intake, thereby boosting the current account. In addition, higher interest rates would lead to a decrease in AD and thus a decline in economic growth. This would increased inflation and lead to greater competitiveness of UK exports.
Deflationary policies would also put pressure on manufacturers to cut costs , leading to more competitive exports, and because of this impact, exports may increase over the long term.

Supply side policies- Supply side policies will enhance the economic competitiveness and make exports more attractive. This may boost the status of the current account, but it can take considerable time to have an impact.
For example, if the government pursues a privatization and deregulation strategy, due to the profit motive in the private sector, it may help to improve the productivity of the economy. This increased productivity would mean lower production costs and more exports

Lower wages-

A policy employed by many economies of the Eurozone facing a large current account deficit (but unable to devalue within the single currency) is to lower wages. Lower wages will lower manufacturing costs and improve competitiveness.

Lower wages, however, would also result in lower aggregate demand, which may lead to deflation which low growth.
If the government cut salaries from the public sector, it could have minimal effect on improving export competitiveness.