Current account deficit is when money outflow is larger than money inflow. To solve this, there should be either increase in money inflow or decrease in money outflow. There are mainly four different policies to solve current account deficit.
A. Expenditure reducing:
This is achieved through contractionary fiscal/monetary policy. These policies decreases aggregated demand (entire demand), which also means there will be less expenditure on import, having less money outflow.
B. Expenditure switching (protectionism):
By having protectionism (such as tariffs, quotas), cost of production for foreign goods and services increases. This strengthens the price competitiveness of local substitutes; hence, there will be higher demand for local goods and services. This will naturally decrease demand for imports, having less money outflow.
C. Exchange rate (depreciation):
By depreciating currency, price of exports decreases and price of imports increases. As prices change, there will be an extension of demand for exports and contraction of demand for imports. Hence, there will be higher money inflow (from exports), while also having less money outflow (from imports).
D. Supply side policies (Investment/Education):
By using supply side policies, quality of factors of production in a country will increase. This will increase the productive capacity and quality of exports, which increases the demand for exports. As a result, there will be higher money inflow from exports, solving current account deficit.
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Hi, thank you for your question.
Current account deficit is when money outflow is larger than money inflow. To solve this, there should be either increase in money inflow or decrease in money outflow. There are mainly four different policies to solve current account deficit.
A. Expenditure reducing:
This is achieved through contractionary fiscal/monetary policy. These policies decreases aggregated demand (entire demand), which also means there will be less expenditure on import, having less money outflow.
B. Expenditure switching (protectionism):
By having protectionism (such as tariffs, quotas), cost of production for foreign goods and services increases. This strengthens the price competitiveness of local substitutes; hence, there will be higher demand for local goods and services. This will naturally decrease demand for imports, having less money outflow.
C. Exchange rate (depreciation):
By depreciating currency, price of exports decreases and price of imports increases. As prices change, there will be an extension of demand for exports and contraction of demand for imports. Hence, there will be higher money inflow (from exports), while also having less money outflow (from imports).
D. Supply side policies (Investment/Education):
By using supply side policies, quality of factors of production in a country will increase. This will increase the productive capacity and quality of exports, which increases the demand for exports. As a result, there will be higher money inflow from exports, solving current account deficit.
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