Why Do We Have? What Factors Affect The Cad? Essay

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Why Do We Have Them? What Factors Affect the CAD?

A current account deficit can arise for several reasons. In some economies, it can be due to poor planning and uncontrolled spending, particularly government-run budget deficits. However, more often than not, a current account deficit is furnished to foster future economic development and growth. Understanding whether or not an economy’s CAD is “bad” is requires understanding its origins and influences.

Balance of trade

The balance of trade is one component of the CAD given by the equation: .
Ostensibly, an increase in revenue of exports would decrease the CAD, while an increase in payments for foreign goods and services would raise the CAD (Bernanke et. al).

An improvement in international competitiveness pushes up export prices, and leads to increased export receipts. Global economic growth increases demand for exports, causing the BOG to increase. These both increase export revenue, moving the CAD towards surplus. The converse is also true.

An improvement in domestic economic growth, however, worsens the CAD. As national income increases, so does consumption; import receipts increase and the BOG decreases.

A higher domestic interest rate will encourage capital inflow and reduce consumption of foreign assets: the higher the interest rate, the higher capital inflows.

The exchange rate is also a factor. As a currency depreciates and loses relative purchasing power, imports become more expensive and export prices

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