Deficits & Surpluses (Cambridge (CIE) IGCSE Economics)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
Reasons for Deficits and Surpluses
If there is a current account deficit, the value of imports must be greater than the value of exports
If there is a current account surplus, the value of exports must be greater than the value of imports
Causes of Current Account Deficits
Relatively low productivity | Relatively high value of the country’s currency | Relatively high rate of inflation |
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Rapid economic growth resulting in increased imports | Non-price factors such as poor quality and design |
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Causes Of Current Account Surpluses
Relatively high productivity | Relatively low value of the country’s currency | Relatively low rate of inflation |
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Consequences of Deficits and Surpluses
As global trade is a net sum game where the value of global exports = global imports, it follows that if one country is running a current account surplus then another country is running a deficit
Consequences of current account deficits include
Increasing unemployment: with falling demand for locally produced goods/services, fewer workers will be required and unemployment will rise
Slow down in economic growth or a recession: exports are a key component of the real GDP of many countries and a fall in exports may significantly reduce the level of economic growth
Lower standards of living: a fall in economic growth usually leads to a reduction in wages which leads to a decrease in the standards of living
Increased levels of borrowing: if the deficit is caused by continually increasing levels of imports, then it is likely that these imports are being paid for through higher levels of borrowing
Depreciating exchange rate: while this may ultimately help to increase exports again, it makes the cost of imported goods/raw materials more expensive and may cause cost push inflation
Consequences of current account surpluses include
Increasing employment: with increasing demand for locally produced goods/services, more workers will be required and unemployment will fall
Economic growth: exports are a key component of the real GDP of many countries and a rise in exports may significantly increase the level of economic growth
Higher standards of living: a rise in economic growth usually leads to a rise in wages which leads to an increase in the standards of living
Demand pull inflation: economic growth caused by a rise in exports will lead to demand pull inflation
Appreciating exchange rate: rising exports will appreciate the exchange rate which leads to imports now being cheaper which causes the demand for imports to rise
Examiner Tips and Tricks
When answering questions on deficits, be absolutely clear if the question refers to a budget deficit or a current account deficit. Students often confuse these two!
A budget deficit refers to the government budget and occurs when the government spending > government tax revenue
A current account deficit occurs when the value of a nation's exports < value of a nation's imports
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