This preview shows page 1. Sign up to view the full content.
Unformatted text preview: he cycle turns and there is a slowdown in spending or a recession. Investment and the supply-side: Some of deficit may be due to increased imports of new capital and technology that will improve productivity and competitiveness of producers. Capital inflows balance the books: Providing a country has a stable economy and credible policies, it should be possible for the current account deficit to be financed by inflows of capital without the need for a sharp jump in interest rates. (ii) (iii) Counter views (i) (ii) Structural weaknesses: The deficit may be a symptom of a wider structural problem i.e. a loss of competitiveness, insufficient investment or a shift in comparative advantage An unbalanced economy: A large trade gap can reflect an `un-balanced economy' typically the consequences of a high level of consumer demand contrasted with a weaker industrial sector. Eventually these "trade imbalances" have to be addressed. Loss of output and jobs: A widening trade deficit may result in lower output and employment because it represents a leakage from the circular flow of income and spending. Workers who lose their jobs in export industries, or whose jobs are lost because of a rise in import penetration, may find it difficult to find new employment. Potential problems in financing a current account deficit: Countries cannot always rely on inflows of capital to finance a current account deficit. Foreign investors may eventually take fright, lose confidence and take their money out. Downward pressure on the exchange rate: A large deficit in trade can lead to a fall in the exchange rate. This would then cause imported inflation and might lead to a rise in interest rates from the central bank. A declining currency would help stimulate exports but the rise in inflation and interest rates would hit demand, output and employment (iii) (iv) (v)...
View Full Document
This note was uploaded on 02/08/2012 for the course ECO 51844 taught by Professor Sabet during the Spring '11 term at FIU.
- Spring '11