Current Account Deficits and Surpluses

Having examined the structure and causes of the balance of payments, this lesson focuses on the policies available to correct current account imbalances and the key theoretical frameworks — the Marshall-Lerner condition and the J-curve effect — that determine whether those policies will be successful.

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Policies to Correct a Current Account Deficit

Policies can be broadly divided into expenditure-reducing and expenditure-switching approaches.

Expenditure-Reducing Policies

Key Definition: Expenditure-reducing policies aim to reduce total spending in the economy (aggregate demand), thereby reducing spending on imports.