Consequences of a current account deficit or surplus
Methods of correction
Devaluation of currency
managed changes in exchange rates
reduction in aggregate demand/expenditure-reducing policies
Increases in taxes/interest rates to shore up spending within a country.
Protectionism: reduces imports
Currency controls: restricts the amount of foreign currency bought by domestic citizens
Supply-side policies: aimed at reducing labor costs, increasing firms' competitiveness
change in supply-side policies to increase competitiveness
protectionism/expenditure-switching policies
Consequences of a capital account deficit or surplus
Marshall-Lerner condition
States that a devaluation of a country's currency will benefit the country's balance of payments only if the combined elasticity values of exports and imports (in absolute value) are greater than 1.
J-curve
A theory which indicates that running a current account deficit may prove to worsen the country's balance of payments situation before improvement is observed, possibly due to the time lag.
