Why would a country have a current account deficit or surplus?

Refresher Current Account Components

Current Account Net trade in goods (sometimes called visibles) exports of goods minus imports of goods Net trade in services (sometimes called invisibles) exports of services minus imports of services Primary income flows From the net lending of factors of production overseas Earnings being transferred to a workers home country (small for UK) Net interest, profits and dividends from overseas assets Secondary income flows When the payment is not as a result of an economic transaction, so transfers Mostly government transfers, such as our payments to the EU

The UK’s current account £ billion 2013 2014 Trade in goods and services Trade in goods -115.2 -123.7 Trade in services 81.0 89.1 Total trade -34.2 -34.5 Primary income Compensation of employees -0.3 -0.4 Investment income -16.0 -32.0 Other primary income -0.5 -0.7 Total primary income -16.8 -33.1 Secondary income General government -22.7 -20.9 Other sectors -4.1 -4.3 Total secondary income -26.8 -25.2 Current balance (current account) -77.9 -92.9 The current account deficit in 2014 was equivalent to 5.2% of GDP – too big

In groups of 3, consider the effect on UK exports or imports of the events listed below: What happens to UK exports if the pound falls in value against other currencies? What happens to imports if the pound falls in value against other currencies? What happens to imports if the government cuts income taxes? What happens to UK exports if Europe goes into recession? What happens to exports and imports if there is an increase in labour productivity in the UK?

Causes of Current Account Deficit High value of pound – UK goods uncompetitive Cheap imports from low wage countries Weak world / EU economy - ↓ demand for UK exports High consumption in UK economy - ↑ imports to meet domestic demand Poor quality, design, availability of UK goods

Costs of Current Account Deficit: Unemployment in export sectors Loss of confidence in UK economy – both abroad and at home – may ↓ investment Fall in value of pound – decreased standard of living for UK citizens who buy imports; ↑ cost of production for imported raw materials Possible benefits: ↑ standard of living from imported products ↓ pressure on inflation from cheaper imports

Is it better to have a current account surplus?

Policies To Reduce A Current Account Deficit: Supply Side Policies: make UK goods more competitive at home & abroad so M & X (preferred) Deflationary Demand-Side Policies: aimed at  demand for everything   demand for imports (not great) Devaluation / Depreciation:  exch. rate → M & X (we don’t use this as a policy in the UK)