Which of the following changes is most likely to improve the current account on a country's balance of payments? (a) Which option should be selected: A risi...

Assessment: Economics 9214 | Paper 1 Mock 01 | Written Paper 1 Subject: Economics - 9214

Question 1 Report

Which of the following changes is most likely to improve the current account on a country's balance of payments?

(a) Which option should be selected: A rising expenditure on holidays abroad, B rising export earnings from software, C rising imports of cars, or D falling income from overseas investments? [1]
(b) Explain why a persistent current account deficit may cause concern for an economy. [3]

Answer Details

(a) Rising export earnings from software is the correct change. Export income is a credit on the current account, so an increase tends to improve the current account balance. [1] Increased holidays abroad and car imports increase outflows, while lower income from overseas investments reduces an inflow.

(b) A persistent current account deficit means the country spends more on imports and income payments than it receives from exports and income inflows. [1] It may have to borrow or sell assets to finance this continuing gap. [1] Future debt repayments and income outflows can reduce living standards, and the deficit may also put downward pressure on the currency. [1]

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