Policies to rectify current account deficit

• Current account deficit


  A situation where a country's imports exceed its exports
• Steps to deal with a large current account deficit


  1. Pinpoint the cause of the deficit

  2. Implement appropriate policies to address the cause
• High domestic demand and high incomes


  Leads to high demand for imports and current account deficit
• Contractionary fiscal policy


  Reducing government spending or increasing taxation to reduce aggregate demand
• Contractionary monetary policy


  Increasing interest rates or reducing money supply to reduce aggregate demand
• Reducing aggregate demand has negative side effects of reducing growth and increasing unemployment
• Effectiveness of demand-side policies depends on factors like consumer confidence, initial economic activity, size of multiplier, and other offsetting factors
• Protectionist measures


  Imposing tariffs to raise import prices, imposing quotas to restrict imports, providing subsidies to domestic firms to make exports more competitive
• Protectionist measures can lead to retaliation from other countries, increasing costs for domestic firms that rely on imports, and reducing competition for domestic firms
• Weakening the currency


  Allowing the central bank to reduce interest rates or intervening in foreign exchange markets to sell the currency and reduce its value
• Weakening the currency can lead to import inflation as imports become more expensive
• Supply-side policies


  Policies to increase the productive capacity of the economy, such as investment in infrastructure, education, and training
• Supply-side policies are expensive, take a long time to work, and their effectiveness depends on the initial level of economic activity
• Governments may not need to prioritize reducing a small current account deficit, as growth, unemployment, and inflation may be more important macroeconomic objectives