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Investment and Current Account Deficit

Question

Discuss whether or not an increase in investment would reduce a deficit on the current account of the balance of payments.

Category:

Balance of Payments

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Preview Answer

I. 🍃Introduction
- Brief explanation of the topic
- Purpose of the outline

II. Reasons why investment might lower costs of production and increase demand for exports
- May make domestic products more internationally price competitive
- Lower export prices
- Advanced technology/more efficient production
- Investment in labour (human capital)
- Investment abroad could increase primary income/income

III. Reasons why investment might not have the desired effect
- Investment may go on imported capital goods
- Investment may be in products which are not in demand abroad
- Investment may cause inflation
- Domestic products may not become more competitive if offset by other changes
- Investment may not be big enough to make a difference

IV. 👉Conclusion
- Summary of the main points
- Final thoughts on the topic

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