automatic correction of current account defecit

• What type of exchange rate is significantly linked to automatically solving a current account deficit?

  A floating exchange rate
• What does a large current account deficit typically imply for a country's trade balance?

  A negative trade balance
• In most countries, which balance is the key determining factor of the current account?

  The trade balance
• What does a large trade deficit imply about a country's imports and exports?

  More imports than exports
• In the pound exchange rate market, what does a trade deficit imply?

  More supply than demand
• What is the net effect of a current account deficit on the supply of the pound?

  Increases supply of the pound
• Why does importing more than exporting increase the supply of the pound?

  Pounds exchanged for foreign currency to buy imports
• What is the impact of an increased supply of the pound on its exchange rate?

  It reduces the exchange rate
• What happens to the exchange rate when a currency depreciates?

  It becomes a weak exchange rate
• According to theory, how does a weaker exchange rate affect imports?

  Imports become dearer
• According to theory, how does a weaker exchange rate affect exports?

  Exports become cheaper
• In theory, how should dearer imports impact the demand for imports?

  Reduce demand for imports
• What should be the impact of reduced demand for imports on the current account deficit?

  Help resolve the deficit
• In theory, how does cheaper exports impact the demand for exports?

  Demand for export should increase
• What are we measuring in the current account?

  The value of transactions
• If expenditure on imports is falling, what does this mean for the economy?

  Less money leaving the economy
• How does increasing revenue from exports affect the current account?

  Great for the current account
• What puts downward pressures on the exchange rate in the UK?

  Imports increasing more than exports
• How does a weaker exchange rate help to automatically correct the current account deficit?

  Imports fall, exports rise
• In the real world, what tends to drive the demand and supply of a currency?

  Speculation
• What impact can speculation have on the theoretical trade effects on currency?

  It can reduce some of this impact
• Why might it be difficult to automatically correct a trade deficit in reality?

  Speculation gets in the way
• What happens to the price of imports when there is a weak exchange rate?

  They become dearer
• What happens to the price of exports when there is a weak exchange rate?

  They become cheaper
• What dominates the impact of trade on a currency by far?

  Speculation