Current Account Deficit Flashcards
(2 cards)
1
Q
State + explain the micro causes of a current account deficit.
A
- Low Productivity: high ULC - drives up CoP for firms - P higher, X less competitive.
- High Relative Minimum Wages: high ULC - drives up CoP for firms - P higher, X less competitive.
- Strong Trade Unions: high ULC - drives up CoP for firms - P higher, X less competitive.
- Resource Depletion: if industry is X dominant + resources are depleting - wont see X gains - leading to CA deficit as an end consequence of that.
2
Q
State + explain the macro causes of a current account deficit.
A
- High Growth At Home: high income at home - sucking in of M.
- Low Growth Abroad: less D for our X - driving a CA deficit.
- Strong Exchange Rate
- High Relative Inflation: makes our X less competitive.
- Poor Investment At Home: means tech / capital machinery might be outdated - drives up costs - keeps X P high + not competitive.
- Loss of Comparative Advantage: countries abroad beat us with comparative advantage - therefore our industries go into decline, deindustrialization - structural unemployment. Won’t see X anymore - see M coming in instead - CA deficit.
