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CAUSES OF Current Account DEFICITS
This could in theory come from any of the four parts of the current account. The UK loses a
lot of money on transfers as many families with links to developing countries in Africa and
Asia send transfers of money to relatives and also the UK government gives billions of aid
and payment to the E.U. and IMF etc.
The U.K. always makes a surplus on its profits and dividend income from its huge
investments overseas. We make a surplus on invisibles as we specialise in banking and
insurance etc. Thus most of our current account deficit comes from huge losses on visible
goods the trade account. We might export high value exports like aerospace and drugs,
but we import huge amounts of cheaper, low wage cost manufactured goods.
A trade deficit means a loss from visible imports against visible exports. A balance of
payments deficit can be a loss on the capital account as hot money for example floods out of
a country, so a trade deficit is to do with the main part of the current account.
1. We can get deterioration in our trade account and thus our current account due to a high
currency, as the pound was from 19972008 i.e.11 years. This makes exports dear so
exports drop if foreign demand is elastic and foreign buyers switch to buying from our
cheaper rivals. A high pound also makes imports cheaper so we buy more. Demand
switches away from countries with high exchange rates making their goods more expensive.
Britain had a large and sustained trade deficit from 19972009.
2. Another major cause could be prosperity and rising real incomes so both consumer
and industrial spending will be high so imports will be sucked in. We spend a third or more
of extra income on imports, foreign cars, clothes and foreign holidays and buying holiday
homes abroad. Also industry buys lots of machines and raw materials from a broad. A
booming, strong economy often has weak trade figures because we buy so many imports
when times are good and we spend. Our credit boom before 2008 meant we bought
Billions of pounds of extra imports.
3.If inflation is high in one country it becomes too expensive and demand will switch to
rivals eventually, especially if the inflation is high and sustained, the inflation has to be higher
than rivals' to make us relatively expensive. This was not true of the UK 19972008 as our
inflation was low, so it was our high pound and our boom that caused our long and large
4. If our main export markets abroad slump then they buy less from us. The Euro zone
grew slowly 2000 to 2006. Again in 2009 the world recession has hit all of our exports
badly as foreign markets like the Euro zone and America have stopped buying although the
pound has fallen and our exports are over 20% cheaper than in 2007.
5. Rapid industrialisation abroad of developing countries like China, India and others
can lead to a surge in imports. Also new cheaper countries can take away our export
markets in Europe etc. With Britain's high wages and high currency it is difficult for
manufacturing to compete with these new, low wage and low currency countries. Now the
pound has depreciated our manufacturing should recover by late 2010 or11. At the moment
(2009) the credit crunch and recession ahs outweighed the benefits of a lower pound.
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A sharp rise in commodity prices, especially oil and energy, can increase the import
bill strongly, as well as cause import cost push inflation. This happened during the boom
years of 20052008 and added to our current account deficit.
7.structural problems (p.121 in Bamford and Grant) A country like Britain may face a
trade deficit because it has the wrong industries and products. Years of industrial decline in
the UK.…read more