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?

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Expert Solution

Current account records the value of import and export in both goods and services. And it also measures the international transfers of capital. It Is a part of Balance of payments, others are Capital account and Financial account.

Long-time persistently large current account deficit is dangerous for an economy because

1. Domestic players will lost their field and there will be dominance of foreign investors.

2. Large current account deficit is the indicator of unbalanced economy- economic growth could be declines

3. Decline in exchange rate, which may lead to cost-push inflation.

4. It may lead to decrease in competitiveness in the international trade.

Though Australia was witnessed current account deficit since 1975, but from June 2019, there was current account surplus in Australia due to improvement in goods and services.

Reasons for Current Account Deficit in Australia

1. For increased relative cost Australian goods lost its competitiveness in the international market.

2. Heavy reliance on imported goods such as different types of processed fruit and vegetables, coffee, chocolates.

3. Low levels of national saving also responsible for current account deficit.

4. Government always tries to compensate budget deficit through foreign borrowing.

Australian Government also now focusing to redevelop the manufacturing sector to reduce current account deficit.

Rahul Sunny answered 1 year ago

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