Causes of current account imbalances

Overview

Structural current account deficit and cyclical current account deficit.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   How does low productivity cause a current account deficit?

   Model answer

   Low output per worker raises unit costs and makes domestic goods dear against foreign rivals. Exports lose sales abroad while imports capture the home market.

2. 2

   How do high factor costs cause a current account deficit?

   Model answer

   High wages, energy prices and land costs raise the price at which domestic firms must sell. Foreign producers with lower costs undercut them at home and abroad.

3. 3

   How does an overvalued exchange rate cause a deficit?

   Model answer

   An overvalued currency raises the foreign price of exports and lowers the domestic price of imports. Export volumes fall while import volumes rise.

4. 4

   How can industrial structure explain a persistent deficit?

   Model answer

   A country whose manufacturing base has shrunk must import goods it once produced itself. Service exports may not be large enough to cover the resulting goods deficit.

5. 5

   How do commodity prices affect the current account of an oil importer?

   Model answer

   A rise in world oil prices raises the import bill of an oil importer immediately. The current account worsens even when import volumes are unchanged.

6. 6

   How do commodity prices affect the current account of an oil exporter?

   Model answer

   A rise in world oil prices raises the export earnings of an oil exporter. The current account improves, sometimes moving into a very large surplus.

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