1. LEARNING OBJECTIVES
To KNOW the different accounts contained within a countries balance of payments.
To UNDERSTAND the causes and problems of a current account deficit.
To BE ABLE to discuss the implications of a current account deficit.

2. The balance of payments

3. The current account consists of the visible account, invisible account and income account (wages, interest and profits). The capital account involves transfers of funds by immigrants and emigrants and Government transfers regarding debt repayments or subsidies with other countries. The financial account records flows of money capital in and out of the country (foreign direct investment, portfolio investment

4. Key learning points: The balance of payments

5. Exports are an injection into the circular flow while imports are a withdrawal (or leakage).
A balance of trade deficit, which occurs when import expenditure exceeds export expenditure, is a net leakage from the circular flow.
A balance of trade surplus (export expenditure is greater than import expenditure) is a net injection into the circular flow.
Is this a problem?

6. The causes of a current account deficit
Incomes falling abroad
Rising incomes at home
An appreciation of the exchange rate
Outflow of investment income
Why a surplus?
High quality, low cost exports
Recession

7. What are the problems of a current account deficit?
Long-run problems of an economy’s international competitiveness?
The economy is spending more on imports than is being spent on its exports. Money is leaving the country
Deflationary effects by reducing AD
May lead to a downward pressure on the exchange rate
The deficit may be financed by financial inflows which may lead to more outflow in the form of profits later

8. To what extent is a current account deficit a problem
It depends on the size of the deficit
It depends on the duration of the deficit
Healthy economy or structural problems?
It does allow for consumption outside the PPF (by importing)