economics : theme 4 - current account deficits

when was the last uk current account surplus

1986

6 causes of a persistent current account deficit

• excessive growth

• high export prices

• non - price factors

• poor productivity

• low levels of investment in real capital

• low levels of investment in human capital

excessive growth explanation

• if the economy grows too quickly and rises above its own trend rate (which in the uk was around 2.5%)

• then domestic output may not be able to cope with domestic aggregate demand

• this leads to increase in demand for foreign goods / services

• however this is not applicable to the uk, more in developing countries

high export prices

• high export prices will occur if a countries inflation (domestic inflation) is higher than that of its competitors (other nations)

• or if its currency is over valued (very strong / appreciated) which will reduce its price competitiveness

non - price factors

• non price factors can discourage exports, such as poorly designed products, poor marketing or a worsening reputation for reliability

• this will lead to a fall in demand and therefore worsening the deficit

poor productivity explanation

• an economy might not be producing enough from its scarce factors of production

• labour productivity, which is defined as output per worker, plays an important role in a country’s competitiveness and trade performance, and the uk has suffered from poor productivity

• the productivity gap is the gap between the uk’s relatively poor productivity (high cost per unit) performance and that of the uk’s leading competitors

low levels of investment in real capital explanation

• this could be caused by excessively high long term interest rates

• or low levels of research and development

low levels of investment in human capital

• involves a lack of investment in education and training

• this reduces skill levels relative to competitor countries and force countries to produce low value exports