Persistent Current Account Deficits (DP IB Economics)
Revision Note
Implications of a Persistent Current Account Deficit
A persistent current account deficit refers to a situation where a country consistently spends more on imports than it earns from exports
The Impact of Persistent Current Account Deficits
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Depreciating Exchange Rates |
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Increasing Interest Rates |
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Increasing Foreign Ownership of Domestic Assets |
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Increasing National Debt |
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Worsening International Credit Ratings |
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Demand Management Conflicts |
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Impact on Long term Economic Growth |
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Examiner Tip
Remember that a current account deficit is different to a budget deficit. A budget deficit refers to the situation in which government spending is higher than government revenue
Correcting a Persistent Current Account Deficit
The Government has several options available to them in order to tackle a current account deficit
They could do nothing, leaving it to market forces in the foreign exchange market to self-correct the deficit
They could use expenditure switching policies
They could use expenditure reducing policies
They could use supply-side policies
The choice of any policy - or any combination of policies generates both costs and benefits
Costs & Benefits of Policies used to Tackle Current Account Deficits
Policy Option | Benefits | Costs |
Do nothing |
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Expenditure Switching |
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Expenditure Reducing |
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Supply-side |
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