University:
London School of Economics and Political Science
Course:
L400 | International Social and Public Policy
Academic year:

2024
Views:

84

Pages:

1
Author:

Prerna T

2 a) Aside from exchange rates, explain two reasons for an economy to run a balance of payments deficit on the current account (4 marks) This was also done badly. Average score 2/4. Joint worst question on paper. Issue was either a lack of revision OR misunderstanding the question. Context: Current Account Deficit: Value of Imports exceeds the Value of Exports. Value being price x quantity. Question is asking why the value of imports might exceed the value of exports. Reasons are as follows: 1. Exports Low: a. Lack of price competitiveness e.g. because of high unit labour costs from low productivity or high wages. Both would count as a separate reason. b. Poor Quality Exports. 2. High imports. a. High incomes and high MPM. As econ growth occurs and income rises, the economy will 'suck' in imports. b. Need to import capital for development (in developing countries). Common Issues: 1. Explaining what a CA deficit means, not why it occurs. E.g. imports are higher than exports. Investment income is high etc. 2. Reason is due to want /ability to run a Financial Account Surplus. Running a CA deficit isn't deliberate (it happens from millions of unconnected decisions e.g. you all daily contribute to a deficit when you buy clothes/petrol etc). Therefore, a FA surplus is a consequence for a deficit or a welcome relief that may provide currency to fund it BUT it is not a reason for it..