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Overview

Lower demand for exports can be caused by

A decline in competitiveness.

There are a number of causes of a lack of international competitiveness. These include an overvalued exchange rate, a relatively high inflation rate, low labour and capital productivity.

A structural deficit is a cause of concern as it will not be self-correcting.

Declining incomes in foreign markets

This can be perhaps due to an economic recession. This means households and firms have less money available to spend on another country's exports.

A current account deficit that arises from either change in the economic cycle of the domestic economy or the economies of trading partners is sometimes referred to as a cyclical deficit.

It is not usually considered to be a problem as it will be relatively short-term and is likely to be self-correcting.

A higher exchange rate

A higher exchange rate makes exports more expensive for foreign buyers, so it reduces the volume and value of exports.

Increased demand for imports can be caused by

Cheaper and better quality imports

Domestic buyers tend to buy more imports if they are cheaper or of better quality. For example, a higher exchange rate means the domestic currency can buy more foreign currency, so this makes it cheaper to buy imports.

Domestic inflation

Domestic inflation means that imports are relatively cheaper, so more domestic residents and firms will tend to buy foreign goods and services.

A growing domestic economy

When firms are increasing their output, they may buy more raw materials and capital goods from abroad. As well as import expenditure increasing, export revenue may decline as a result of exports being diverted from the foreign to the domestic market.

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Causes of a current account deficit

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