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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)...
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This note was uploaded on 02/08/2012 for the course ECO 51844 taught by Professor Sabet during the Spring '11 term at FIU.

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