Policies to correct current account imbalances
Introduced| English | Meaning |
|---|---|
| competitiveness/kəmˈpetɪtɪvnəs/ | The ability of a business or economy to attract buyers and succeed relative to alternatives. |
| expenditure-switching/ekˈspendɪtʃə ˈswɪtʃɪŋ/ | Describing policies that redirect spending between domestic and foreign goods and services. |
| depreciation/dɪˌpriːʃɪˈeɪʃn/ | A fall in the value of an asset or currency over time. |
| expenditure-reducing/ekˈspendɪtʃə rɪˈdjuːsɪŋ/ | Describing policies that lower total spending, often to reduce demand for imports or address an external deficit. |
| supply-side/səˈplaɪ saɪd/ | Concerned with the productive capacity, costs or efficiency of an economy's producers. |
Fixing a trade deficit
- A country running a big, persistent current-account deficit can't borrow forever. What can it do?
- Three broad approaches: switch spending toward home goods, reduce spending overall, or improve competitiveness 竞争力.
Current account flow
Track exports, imports and income flows into the current account.
Which is an expenditure-switching policy to reduce a current account deficit?
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Depreciation switches spending toward home goods; the others reduce total expenditure.
Expenditure-switching 支出转换
- Expenditure-switching policies push spending from imports toward domestic goods:
- devaluation/depreciation 贬值 (makes imports dearer, exports cheaper) and tariffs/quotas.
A currency exchange: the exchange rate is the price of one currency in terms of another
Expenditure-reducing policies cut a deficit by:
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Lower total demand pulls down imports — but at the cost of slower growth.
Expenditure-reducing 支出减少
- Expenditure-reducing policies cut total demand, so imports fall:
- contractionary fiscal (higher tax, less spending) and contractionary monetary (higher interest rates).
- The cost: slower growth and higher unemployment.
Supply-side policies aim to improve competitiveness as a long-run fix for a deficit.
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Raising productivity makes exports succeed without relying on a weaker currency.
Classify each policy.
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Switching shifts spending; reducing cuts demand; supply-side raises competitiveness.
Supply-side 供给侧 (the long-run fix)
- The durable solution: supply-side policies that raise productivity and competitiveness, so exports succeed without a weaker currency.
- Education, infrastructure and investment make home goods more attractive at home and abroad.
The Marshall–Lerner condition. A depreciation only improves the current account if demand is elastic enough (PED of exports + PED of imports > 1); otherwise it can make the deficit worse at first (the J-curve).
A depreciation improves the current account only if the Marshall–______ condition holds.
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Marshall–Lerner: PED exports + PED imports > 1.
You've got it
- expenditure-switching: devaluation/depreciation, tariffs — shift spending to home goods
- expenditure-reducing: contractionary fiscal/monetary — cut total demand (and imports)
- supply-side policies are the long-run fix (raise competitiveness); mind the Marshall–Lerner condition
Write from imports falling by 20
- A rise in income tax cuts total spending.
- Imports fall from 90 to 70, and the exchange rate is unchanged.
By how much do imports fall, and what kind of policy is this?
Lower total spending pulls imports down.
What kind of policy cut imports from 90 to 70?
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A tax rise cuts total spending, including imports.