Effectiveness of Correction Measures (HL only)
Balance of Payments
AO3·HL
Syllabus requirement
Evaluation of the effectiveness of different policy responses to correct a current account deficit.
Assessment objectives
AO3 Synthesis and Evaluation
Higher LevelThis topic is assessed at HL.
Summary
This topic explains how governments can try to correct a persistent current account deficit using three policy types: expenditure-switching, expenditure-reducing and supply-side policies. The effectiveness of each depends on factors such as price elasticity of demand for exports and imports, the cause of the deficit, dependence on imports, risk of retaliation and the time horizon for results.