6.4 Current Account of Balance of Payments (Cambridge (CIE) IGCSE Economics)

True.

A current account deficit occurs when the value of imports is greater than the value of exports.

False.

Currency appreciation makes a country's exports more expensive relative to other nations.

False.

A relatively high rate of inflation is a cause of a current account deficit.

Poor quality and design of products can cause a current account deficit as exports fall.

True.

A current account surplus occurs when the value of exports is greater than the value of imports.

A relatively high productivity is a cause of a current account surplus. High productivity increases output and leads to more sales (exports).

Currency depreciation makes a country's exports less expensive relative to other nations, leading to a current account surplus.

False.

A relatively low rate of inflation is a cause of a current account surplus. Relatively low inflation leads to relatively lower prices and increased exports.

Two consequences of a current account deficit include:

• Increasing unemployment,

• Slow economic growth or a recession

• Lower standards of living

• Increased borrowing

Two consequences of a current account surplus include:

• Increasing employment

• Economic growth

• Higher standards of living

• Demand pull inflation

True.

Doing nothing to address the current account deficit means leaving it to market forces in the foreign exchange market to self-correct the deficit.

Expenditure switching policies aim to switch consumer expenditure from foreign markets (imports) to domestic markets. They include protectionist policies, which raise the price of imports, and currency devaluation, which makes the price of imports more expensive.

The aim of expenditure reducing policies is to reduce the amount of money spent by households on imports. They include raising taxes, which cause consumers to have lower disposable income, and raising interest rates, which reduce the level of borrowing, resulting in a fall in the level of imports.

An advantage of expenditure switching policies is that they are often successful in changing the buying habits of consumers, switching consumption from imports to domestically produced goods and services.

A disadvantage of expenditure switching policies is that they often lead to retaliation by trading partners, which may offset any improvement to the deficit caused by the policy.

A disadvantage of expenditure reducing policies is that contractionary fiscal policy also dampens domestic demand. This can cause output to fall, slowing GDP growth and increasing unemployment.

An advantage of using supply-side policies is that they improve the quality of products and lower the costs of production. Both of these help increase the level of exports, reducing the deficit.