Question

what step need to take to fix a country is current deficitaccount ?

Answer 1

Ans)

Below sets need to take to fix a country's current account defict

1. Devaluation of exchange rate (make exports cheaper – imports more expensive)
2. Reduce domestic consumption and spending on imports (e.g. tight fiscal policy/higher taxes)
3. Supply side policies to improve the competitiveness of domestic industry and exports.

Explanation

Devaluation:

This involves reducing the value of the currency against others. (e.g. selling pounds would cause the value of the Pound to fall)

• If there is a devaluation of the currency, the price of imported goods increases and therefore the quantity demanded of imports falls.
• Exports will become cheaper, and there will be an increase in the quantity of exports.
• Therefore, assuming demand is relatively price elastic, we would expect a devaluation to lead to an improvement in (X-M) and therefore the current account on the balance of payments.
• However, it does depend upon the elasticity of demand for exports and imports

Monetary policy

Tight monetary policy involves increasing interest rates.

• Higher interest rates will increase the cost of debt and mortgage repayments and leave people with less money to spend. Therefore, this will reduce their consumption of imports, improving the current account.
• Also, higher interest rates will cause a fall in AD and therefore reduce economic growth. This will reduce inflation and help to make UK exports more competitive.
• Deflationary policies will also put pressure on manufacturers to reduce costs, and this will lead to more competitive exports, and so exports may increase in the long run because of this effect

Supply side policies

• Supply side policies can improve the competitiveness of the economy and help make exports more attractive. This can improve the current account position, but it may take considerable time to have an effect.
• For example, if the government pursued a policy of privatisation and deregulation it may help to increase the efficiency of the economy because of the profit motive in the private sector. This increased efficiency would translate into lower costs of production and more exports