F581/ F582 Economics June 2013

What is a current account deficit? Is it different to a budget deficit?

What is a current account deficit? Is it different to a budget deficit?

friend, a budget deficit is when the government spends more than it receives in taxes

a current account deficit is when a country imports more than it exports (as well as the other components of the current account like income)

What is a current account deficit? Is it different to a budget deficit?

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OK for those stressing - here's a nice little Plan for the infamous essay " Discuss whether a current account deficit is always harmful " :

Introduction - provide a general understanding of the current account , what a deficit means and then answer whether you think its harmful or not ( that last bit ain't necessary though )



LRAS DIAGRAM REPRESENTING REDUCTION IN AGGREGATE DEMAND

EVALUATION :

- depends on duration of deficit , if its been going on for ages it shouldn't cause a lot of problems
- depends on the level of economic activity in the economy at the time as to whether the reduction in AD caused by the deficit will be very harmful or not

Does that mean that a trade deficit which is more imports than exports is the same as a current account deficit?

How does fiscal, monetary and supple side policies control the current account balance?

And what does 'trade offs' between policies mean?

Thanks for essay points for the current account deficit, could you please explain the two points? For the first point wouldn't it be more harmful it its been going on for a long time? Also would it be harmful in the short and long run?

How does fiscal, monetary and supple side policies control the current account balance?

And what does 'trade offs' between policies mean?

yeah i can -

nah if its been going on for a long time , then that shows that theres still quite massive capital and financial flows into the economy that its able to sustain a deficit for a long time - hence the country can still attract investment and it shows the country can cope with it , thus it's not as harmful.

as for the position of the economy one - if the economy is operating at significantly spare capacity then a reduction Aggregate Demand is unlikely to have much of an effect on employment and the price level ( draw an LRAS Diagram - that gives a better representation of what i mean ) than if the economy was operating at full capacity - here the effects could be fairly harmful employment would drop considerably and so would real national output.

sorry if thats not explained properly haha , but an LRAS Diagram can explain that better

could someone kindly write down all the conflicts between the policies please?

The objective of growth and low unemployment may benefit from expansionary demand side policies. however may make it more difficult for the government to achieve low inflation.

Also the marginal propensity to consume may conflict with high interest rates to reduce demand pull inflation, and also may have a bad effect on the exchange rate and so the balance of payments and employment

Hope that helped

Is the current account deficit harmful because the exchange rate is too high? i.e. if the currency is overvalued imports become competitive and there will be a higher quantity of imports thus exports will become uncompetitve and there will be a lower quantity of exports. (if that makes sense)