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Economics: Foreign Trade - Example Papers

Economics: Foreign Trade


a) Explain what is meant by a Current Account Deficit and why is it considered 'bad' to have an increasing CAD?
The Current Account Deficit generally means that our nation is spending more than it earns. This means that we have to borrow from other countries in order to pay for the things we purchase (imports). When we borrow from them we have to pay interest rates and these are additions to the original debt, therefor they increase the total debt owed.
It is considered a bad thing to have an increasing current account deficit because we are borrowing from other countries and then repaying them even more, due to interest rates. We are increasing the flow of money out of our economy and ...

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of the exchange rate, freight and tourism and international competitiveness.

The first reason is the fact that interest rates on existing debt are high as well as the fact that we don't save enough, adds a considerable cost onto the final debt. Higher interest rates drive us further into debt than we began with, leading to a greater debt.

Second is worsening of terms of trade. When import prices rise faster than export prices, the terms of trade will turn against us. We will sell what we make at a cheaper price than what we bought it for.

High consumer spending is another reason for the sustained current account in Australia. If the government spends more than it takes from people (taxes), a deficit budget occurs. This increases consumer spending even though we can't afford it.

Inflation also contributes to the current account deficit as it influences international competitiveness. If workers wages don't match the level of productivity, then businesses don't match overseas ...

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PAPER DETAILS
Added: 1/1/2007 08:10:35 AM
Category: Economics
Type: Premium Paper
Words: 861
Pages: 4

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