Question

Summary:
The covid-19 crisis will certainly cause a fall of global trade.

Why most European governments will experience current account deficits? Which is one of the main policies to reduce current account deficit? Present specific data to support your argument.

Please without plagiarism, thank you :)

Answer 1

The current account is one of the components of the Balance of Payments of an economy which accounts for the balance of trade and other components of income and unilateral transfers.

A deficit in the current account primarily suggest that the value of the imports of goods and services of a country is higher than the value of the goods & services it exports.

The COVID-19 has created an unprecedented impact on global economy. OECD (Organization for Economic Cooperation and Development) has projected the global GDP could reduce by 24% annually as a result of the containment measures (such as lockdown). The European countries are significantly affected where the production of goods and services have declined to an unprecedented level, argued even worse than the Great depression of 1930s’.

Under such circumstances the European governments will have to import considerable value of goods and services to heal their paralysed economies without significant exports to finance their import bill. Thus, the CAD (Current account deficit) is expected to rise for such governments. The imports of capital goods, particularly electronic items are likely to increase which can create CAD problems for such countries.

CAD can be reduced by the following policies:

1. Devaluation of the currency

It makes exports cheaper which can boost the demand for the same and reduce CAD.

2. Protectionism policies:

Certain barriers can be created against imports by way of tariffs and quotas to reduce imports of comparatively less essential items.

3. Supply side Policies:

Concessions and subsidies can boost the domestic industry and exports which can reduce CAD.