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PART III. COPING WITH THE CURRENT ACCOUNT DEFICIT

PART III. COPING WITH THE CURRENT ACCOUNT DEFICIT

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COPING WITH THE CURRENT ACCOUNT

DEFICIT

II.CURRENCY DEPRECIATION

A. U.S. Experience:

Does not improve the

trade

deficit.



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COPING WITH THE CURRENT

ACCOUNT DEFICIT

B. Depreciations are ineffective

because

1.

It takes time to affect trade.

2.



J-Curve Effect

states that a decline in

currency value will initially

worsen the deficit before

improvement.

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THE J - CURVE

Net

change

in trade

balance



Trade balance

improves



Currency

depreciation



TIME



0



Trade balance

initially deteriorates

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COPING WITH THE CURRENT

ACCOUNT DEFICIT

III.



PROTECTIONISM

A. Trade Barriers used:

1. Tariffs

2. Quotas

B. Results:

Most likely will reduce both

X and M.

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COPING WITH THE CURRENT

ACCOUNT DEFICIT

C. FOREIGN OWNERSHIP

one protectionist solution would

place limits on or eliminate

foreign ownership

leading to

capital inflows.



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COPING WITH THE CURRENT

ACCOUNT DEFICIT

D.



STIMULATE NATIONAL SAVING

change the tax regulations and

rates.



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COPING WITH THE CURRENT

ACCOUNT DEFICIT

III. SUMMARY: CURRENT-ACCOUNT

DEFICITS

- neither bad nor good inherently

1. Since one country’s exports

are

another’s imports, it is not possible

for all to run a surplus



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COPING WITH THE CURRENT

ACCOUNT DEFICIT

2.



Deficits may be a solution to

the problem of different

national propensities to save

and invest.



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PART III. COPING WITH THE CURRENT ACCOUNT DEFICIT

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