the current account & ad/as model

The Current Account & AD/AS

Current Account & AD/AS

• Exports (X) and Imports (M) are components of Aggregate Demand

• So if a current account deficit exists then it will impact on Aggregate Demand

• Current Account Surpluses and Deficits will have an effect

Surplus on the Current Account

• This means we are exporting more than we are importing

Deficit on the Current Account

• This means we are importing more than we are exporting

AD1

Current Account Equilibrium

• This is where the current account has no effect on the demand in the economy

Does a Current Account Deficit Matter?

Yes No

UK is less competitive now, due to lack of investment and low productivity

A deficit is no problem provided that there is enough foreign capital flowing into a country to finance it

A deficit indicates withdrawals from the circular flow which means that if this keeps happening jobs will be lost

A deficit is self clearing

Unemployment will rise due a fall in domestic demand

The deficit may have been caused by expenditure on Capital Goods which would benefit the export industry