Notesale: Turn your study into money

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Evaluate the means by which the current account trade deficits could be reduced
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Imports and exports are
components of the current account on the balance of payments
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Contractionary fiscal policy is when the government reduces AD (which can be
done by raising taxes and cutting government spending) and therefore reduces the amount
spent on imported goods as people have less money to spend
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This policy
is an expenditure reducing policy as it makes people poorer as an impact of reducing AD
because they are paying higher taxes
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(Draw AD shifting to the right on an LRAS curve)
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With countries such as the UK which has an extremely high MPM (it
is thought that for every £ a UK citizen has, 80p of it is spent on imports showing the high
amount that is imported), this may cause a lot of hardship for the country and they will have
to change their lifestyles indicating that their living standards have fallen
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Another way that current account trade deficits could be reduced is through supply side
policies
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An example of this is reducing unit labour costs (the
cost of producing one unit of labour)
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A shift right in AS means that exports become cheaper as prices fall and therefore
more appealing to international consumers and this will help a country’s trade deficit as
they can raise the amount of exports they sell and close the gap between their imports and
exports, solving the imbalances of trade
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This makes them less
desirable compared to demand side policies because using these policies they don’t need to
wait for the changes to happen and can give the trade deficit a quick fix instead of waiting a
while for it to recover through using the supply side policies
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Also, trade unions wont like the use of
cutting labour costs and lowering wages and it may also be illegal under some UK/EU law
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Another mean that the current account deficit can be reduced is through protectionism
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Examples
of protectionism include tariffs and quotas which make it more desirable for people to
purchase goods from their own country as they will now be cheaper due to the taxes on
those from abroad
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However, this can limit a country from becoming internationally competitive as they are
isolating themselves from trading with other countries because they will not want to
provide to them when they know that they will have a limit or not sell as much due to the
taxes raising their prices
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For example, if the PED of imported goods are inelastic (PED > -1),
then people may still import like they previously had, despite there being a tariff on the
item
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