causes of current account deficits - CENTRE

What are commodity prices?

Commodity prices refer to the market prices for raw materials or primary goods, such as oil and gas, which can be volatile.

How can rising commodity prices cause a current account deficit?

If commodity prices rise, industries will spend more on imports, which increases the current account deficit.

What is the effect of higher import costs on the current account?

Higher import costs increase the value of imports compared to exports, causing the current account deficit to increase.

How do exchange rates affect the current account deficit?

If a country's currency becomes stronger, exports become more expensive and imports cheaper, reducing exports and increasing the current account deficit.

What happens to exports when the domestic currency rises in value?

Exports become more expensive for foreign consumers, potentially decreasing demand for exports.

What happens to imports when the domestic currency rises in value?

Imports become cheaper, leading domestic consumers to buy more imported goods, which can increase the current account deficit.

What is non-price competitiveness?

The ability to compete based on factors other than price, such as quality, design, reliability, and innovation.

How can poor non-price competitiveness affect exports?

Low investment and R&D can lead to lower quality domestic goods compared to competitors, reducing exports and increasing the current account deficit.

How can a recession in a trade partner affect the current account?

A recession abroad can reduce demand for a country's exports, causing export earnings to fall and worsening the current account.

How does slower growth in trading partners affect a country's current account?

Lower growth in other countries reduces demand for the country's exports, which can increase the current account deficit.

How does relative inflation cause a current account deficit?

If domestic inflation is higher than that of trading partners, exports become more expensive and imports relatively cheaper, reducing exports.

What is the effect of higher inflation on exports?

Higher inflation makes exports less competitive due to increased costs, leading to reduced foreign demand.

How can an economic boom cause a current account deficit?

Higher incomes during an economic boom increase consumer spending, leading to more imports.

Why do imports increase during an economic boom?

Consumers have higher incomes and tend to spend more on normal goods, including imported products.

How can domestic producers contribute to a current account deficit during a boom?

Firms may import more raw materials from overseas to meet higher demand, increasing imports.

What is the overall effect of increased imports on the current account?

A rise in imports leads to an increase in the current account deficit.