A current account deficit means more money going out than coming in. That shows up in the foreign exchange market.
What pushes the current account into deficit
Rising incomes
People buy more of everything, including imports.
Barriers removed
Without a quota or tariff, imports rise.
Uncompetitive exports
High costs or a strong currency cut export sales.
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The financial account moves the exchange rate too.
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The points to remember
- Write it like this: "A current account deficit raises the supply of the currency, putting downward pressure on the exchange rate."
- "Financial inflows raise demand for the currency, so it appreciates."
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Paper 1 asked this in November 2024, as part (a) for 10 marks.
Explain how the removal of an import quota could lead to a current account deficit.
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How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |