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Looking at the impact of the Current Account on AD/AS
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The Current Account & AD/AS
Current Account & AD/AS
• Exports (X) and Imports (M) are components of Aggregate Demand
• So if a current account deficit exists then it will impact on Aggregate Demand
• Current Account Surpluses and Deficits will have an effect
Surplus on the Current Account
• This means we are exporting more than we are importing
Deficit on the Current Account
• This means we are importing more than we are exporting
AD1
Current Account Equilibrium
• This is where the current account has no effect on the demand in the economy
Does a Current Account Deficit Matter?
Yes No
UK is less competitive now, due to lack of investment and low productivity
A deficit is no problem provided that there is enough foreign capital flowing into a country to finance it
A deficit indicates withdrawals from the circular flow which means that if this keeps happening jobs will be lost
A deficit is self clearing
Unemployment will rise due a fall in domestic demand
The deficit may have been caused by expenditure on Capital Goods which would benefit the export industry