LT: ‘Does The Current Account Deficit Matter?

DTC: ‘What Is The Most Effective Policy To Improve The UK’s Current Account
Balance?’
Yes No
3 main reasons: 3 main reasons:

The UK is not self-sufficient. This means we a re
reliant on imports. This is because the UK
doesn’t have enough raw resources to be self-
sufficient. This is a structural problem in the
UK’s economy because the UK does not have
enough natural resources. This is a long-term
factor in the UK economy.
Low quality goods produced in the UK and the
high price. Not enough money is spent in R&D
so product quality is not high. The UK has the
lowest productivity out of all the G7 countries
which pushes up the cost of production. A high
minimum wage pushes up cost of production
further. This overall increases prices of goods.
There is lower demand for UK goods. This
means the Government gets lower tax revenue
because of lower exports. This could mean
businesses go bankrupt and can cause lower
levels of employment. This is since growth is
lower and employment is a derived demand of
growth so there will be more unemployment.
This leads to the Government spending more
on welfare.
The current account deficit could self-correct. A
lower amount of exports means that there is
lower demand for the pound. A shift inward for
the demand of the pound causes a lower price
for the pound so there will be a depreciation.
This could make exports cheaper.
The fact that the UK economy was growing
shows that the Government could pay for the
current account deficit because it wasn’t reliant
on the tax revenue raised from exports. The
fact that the demand for exports is low will
reduce demand pull inflationary pressure.
If we import raw materials and capital, this can
make us richer in the long term. The UK can use
these raw materials and machinery to make
better quality products to boost exports.

Conclusion

Overall, the current account deficit does matter because a lower demand for UK goods causes
lower tax revenue for the government as well as employment. Although the current account
deficit could self-correct, there will be a significant lag time for this.