Persistent Current Account Deficit (HL only)
Balance of Payments
Syllabus requirement
Consequences of ongoing deficits such as depreciation, foreign ownership of assets, rising debt, falling credit ratings, demand management and constraints on economic growth.
Summary
This topic examines the economic consequences of a persistent current account deficit in an open economy and the policy options governments have to correct it. It covers how sustained deficits affect exchange rates, interest rates, foreign ownership, public and external debt, credit ratings, aggregate demand and long-run growth, plus three groups of corrective policies: expenditure-switching, expenditure-reducing and supply-side measures. Understanding these effects helps explain trade-offs between stabilising the balance of payments and maintaining growth and employment.