6.5.1 Government policy objective of stability of the current account
The government aims for stability of the current account: neither a large, persistent deficit nor a large, persistent surplus. A deficit means money leaving the country on trade in goods, trade in services, primary income and secondary income exceeds money entering it. Policies fall into four categories: protectionist, monetary, fiscal and supply-side.
Example: India aims to keep its current account deficit at a sustainable level (around 1–2% of GDP) so that it can be financed comfortably by capital inflows.
Analysis chain (AO2): Large persistent deficit → must be financed by borrowing or selling assets → foreign debt rises → pressure on the exchange rate → possible currency crisis; large persistent surplus → may cause appreciation pressure and trade friction.
Evaluation (AO3):
- A small or temporary deficit may not be a problem, especially if financed by long-term FDI.
- The size of the imbalance relative to GDP matters more than the absolute figure.
🔒 Also in the full notes
- 6.5.2 Effect of fiscal, monetary, supply-side and protectionist policies on the current account
- Exam practice: 6 practice questions
- 3 exemplar answers with full model answers and mark breakdowns
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