Causes and effects of an imbalance 2 / 5

Causes and effects of an imbalance

Reasons for deficits

There are many factors that can cause a country to suffer a current account deficit.

Meaning Import (M) > Export (X)

CauseExplanation
High production costsThis may be due to out dated machinery or labour costs being too high
Unable to competeDomestic firms may be too small to compete with larger international rivals.
High exchange rateThis makes exports more expensive and imports cheaper.
High levels of aggregate demandIf aggregate demand is high then imports will rise (more foreign goods are purchased as well as local goods) but exports will not rise (and may even fall if local firms divert production from overseas markets to the local market)