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  • Balance of payments, exchange rates

Click to read the article below and then answer the questions:

UK’s yawning current account deficit raises financing risks

  • ‘The current account deficit — which includes the i) UK trade balance and ii) the net income from foreign investment and iii) transfers — deteriorated to a record 8.3 per cent of gross domestic product.’ Briefly distinguish between points 1-3

  • ‘With such a gap between the country’s consumption and its production, the pound can only maintain its value if foreigners want to lend to Britain or buy up assets such as land . .. ’ Using an exchange rate diagram, analyse this statement

  • ‘A falling currency is often part of the solution to a gaping current account deficit.’ With reference to the Marshall-Lerner condition, analyse the impact of a falling currency on the current account balance

Gavin Clarke, Emmanuel College

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