IGCSE Development Studies: Specimen Questions with Answers 51 - 52 of 98

Explanation

Problems of Current Account Deficit Are

• Foreigners have greater claim on domestic assets.
• Large deficit could be unsustainable, if financed from abroad.
• It may indicate unbalanced economy- focused on short term consumption rather than longer investment in export sector.
• Large deficit could cause depreciation in the exchange rate and cost push inflation.
• For countries with fixed exchange rate it may indicate they have become uncompetitive due to higher inflation and if exports over-priced reduce domestic demand.

Explanation

Deficit in the balance of trade occurs when the value of imports of goods and services and investment increases than the total value of exports of goods, services, and investment. There are several factors that cause deficit in the balance of trade:

• Not enough domestic companies involved in exporting of goods and services.
• If the value of the domestic currency is over-valued imports will be cheaper thus the value of exports will be greater.
• If the national income increase people will tend to spend more on the consumption of goods and services and if domestic producers are not able to meet the domestic demand then goods and services will be imported from foreign countries.
  • Domestic companies are not internationally competitive.
  • Over rating of the country՚s currency.
  • Government՚s budget deficit.