State two possible causes of a current-account deficit for a country whose consumers have increased spending on imported smartphones and foreign streaming s...
Question 1 Report
State two possible causes of a current-account deficit for a country whose consumers have increased spending on imported smartphones and foreign streaming subscriptions. The government is concerned that persistent deficits may weaken confidence in the economy.
(a) State two causes of the deficit in this situation. [2]
(b) Explain one policy the government could use to reduce demand for imported smartphones. [2]
(c) Assess whether reducing imports is always the best way to improve the current account. [2]
Answer Details
(a) Two causes shown in the situation are:
- high consumer spending on imported smartphones; [1]
- payments for foreign streaming subscriptions. [1]
Both are payments to overseas producers. They increase imports of goods or services, worsening the current account.
(b) The government could impose a tariff or tax on imported smartphones. [1] This raises their price, so consumers are likely to demand fewer imported phones. [1]
(c) Reducing imports can improve the trade-in-goods balance and hence help the current account. [1] However, it is not always best: tariffs can raise prices for consumers, lead to retaliation by trading partners, or restrict firms' access to imported inputs. Increasing exports may instead be a more sustainable way to improve the current account. [1]
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