The Causes of a Deficit on the Current Account of the Balance of Payments
- This occurs when the country’s expenditure abroad exceeds its revenue from abroad.
- This can be because the country’s inhabitants have spent more on goods and services abroad than foreigners have spent on UK goods, e.g.:
- A decrease in incomes abroad is likely to mean that demand for the country’s exports will fall
- A rise in income at home is likely to mean that consumers will buy more products; some of these will be domestic products intended for the export market and others could be foreign imports.
- A rise in the exchange rate may also result in a deficit, as it will raise export prices and lower import prices
- There has been a net outflow of investment income, e.g.:
- Investments that foreigners make in the UK earn more than investments UK residents earn from other countries
- A cyclical deficit (e.g. caused by changes in income) will be of less concern to a government than a structural deficit
- g. A government will be more concerned by a deficit if it’s caused by a country’s firms charging too much for their products, producing products of poor quality or not picking up on changes in demand; rather than fluctuations in the economic cycle.