Floating Exchange Rates + Current Account Deficit

• Floating exchange rate

  Solving automatically a current account deficit
• The UK has a large current account deficit
• The UK has a very large trade deficit
• Trade deficit


  Implies the UK is importing a lot more than it's exporting
• Current account deficit and trade deficit

  The supply of the pound keeps shifting to the right
• Supply of the pound increasing

  Reduces the exchange rate of the pound, depreciates the pound
• Pound depreciating


  Imports become dearer, exports become cheaper
• Imports becoming dearer

  Reduces demand for imports, reduces expenditure on imports
• Exports becoming cheaper

  Increases demand for exports, increases revenue from exports
• Current account deficit

  Downward pressures on the exchange rate
• In the real world, the theory of floating exchange rates automatically correcting a current account deficit does not happen
• Speculation tends to drive the demand and supply of the currency, dominating the impact of trade
• In the real world, the theory does not take place as other factors override it