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Factors which cause a current account

deficit in the balance of payments
A current account deficit occurs when the value of imports (of goods, services and
investment incomes) is greater than the value of exports.
There are various factors which could cause a current account deficit:
1. Fixed Exchange Rate
If the currency is overvalued, imports will be cheaper and therefore there will be a higher
Q of imports. Exports will become uncompetitive and therefore there will be a fall in the
quantity of exports.
2. Economic Growth
If there is an increase in national income, people will tend to have more disposable
income to consume goods. If domestic producers can not meet the domestic demand,
consumers will have to import goods from abroad. In the UK we have a high Marginal
propensity to imports mpm because we do not have a comparative advantage in the
production of manufactured goods. Therefore if there is fast economic growth there
tends to be a significant increase in the quantity of imports.
3. Decline in Competitiveness.
In the UK there has been a decline in the exporting manufacturing sector, because it
has struggled to compete with developing countries in the far east. This has led to a
persistent deficit in the balance of trade.

Higher inflation
This makes exports less competitive and imports more competitive. However this factor
may be offset by a decline in the value of sterling.

Recession in other countries.
If the UK’s main trading partners experience negative economic growth then they will
buy less of our exports, worsening the current account.

politicians.) Means that much Rupee currency is “gone” from Indian system via current account. from American point of view). raw material. the Indian importer will pay 500 billion Indian rupees to that American exporter. atleast in theory. Since there is no forex agent. Again our rupee currency comes back.Why BoP = 0 in theory?  Assume there are only two countries India (rupees) and USA (dollars). taxation. current account + capital account = ZERO (balance of Payment). cricketers. he cannot even buy a burger from local McDonalds shop using Indian rupees. if rupee goes out. steel and plastic for further production of Apple6) = our rupee currency comes back to India via current account. saahbahu serials nothing…  Now Indian importer buys Apple6 phones worth 10 billion US$ from American exporter. Hence there will be statistical discrepancies.49=1$ or Rs. He can find a 2nd American who wants to import something from India / wants to invest in India. errors and omissions and. . Apple6 guy can sell his rupee currency to that third American fellow @Rs. 4.g. it has to come back.  Therefore. regulation. So. So what can he do? 1.  But that American exporter has no use of Indian rupees! He lives in USA.99=1$ (depending on the desperation of that 2nd American fellow). He can buy some shares or bonds in India.  In short. BoP is expressed as: Current Account + Capital account + Net errors and omissions = 0 (Balance of Payment). 2.50=1$ or Rs.  But in reality. And there are no forex agents or middlemen. He can import something else from India (e. (same for dollar. RBI or tax authorities never have complete details of all financial transactions and currency exchange rates keep fluctuating. He can “invest” that Indian currency to setup some factory or joint venture in India (=our rupee currency comes back to India via capital account) 3. (assuming 1$=50 Rs.

whatever currency goes out of the country. a country can have “TEMPORARY” surplus or deficit in BoP. in BoP. This NRI wants to send money (dollar earned by working in USA) to his family back in India. There is a good chance. . BoP is calculated on quarterly and yearly basis. Indian Government may put some FDI/FII restrictions so Apple6 exporter (or that third American guy) cannot re-invest in India even if he wants to. o There are many other possibilities and combinations – but the point is. system will balance itself. for example o Apple exporter will find some fourth American importer and convince him to pay Indian exporter in rupee currency and thus apple guy will get rid of his 500 billion Rupees by exchanging it with that American importer’s dollar o Or the apple exporter will find some NRI living in USA. we can express this as Current Account + Capital account + Financial account + balancing item = 0  Ok then does it mean a country can never have surplus (or deficit) in Balance of payment?  Well. Because.In IMF definition. that American Apple6 exporter may not invest back all those 500 billion Indian rupees in India within that time-frame.  But in the long run.  Secondly. (preferably in Indian currency ) so this NRI will be willing to exchange his dollar savings with that Apple exporter’s rupees. will come back to the country.