Current account deficit, Microeconomics

Assignment Help:

Current Account Deficit (CAD):

Boon or Bane The general belief is that high CADs are dangerous. In general, this is correct. But the converse that low CADs are good is not. As seen above, a CAD is nothing but a measure of a country's savings gap, i.e., the excess of investment over savings. It represents  the net transfer of resources from the rest of the world to the country running the deficit. Therefore, in a developing country, with a huge needs for funds for investment, a CAD makes sense. It allows it to finance investments that would have been well beyond what it could hope to finance with its own savings. On the flip side, CADs are to be financed by foreign capital inflows. The capital flows are fickle, can be reversed, and have to be serviced. The right CAD for any country, therefore, depends on its ability to absorb and service capital inflows. If these resources can be deployed productively and in ways that enhance its ability to repay, a high CAD to GDP ratio is nothing to worry about. But if they cannot, then it is inviting trouble. Too high a ratio canprove unsustainable in the long run as it did in East Asian economies in 1998and in Mexico earlier.

To that extent low ratio has its advantages. But, very low ratio carries with it an opportunity cost?of not being able tobenefit from resources that could be drawn from outside.  


Related Discussions:- Current account deficit

Explain how oligopolies can work, Explain how oligopolies can work both for...

Explain how oligopolies can work both for and against consumers. Oligopolies market power can of course work against consumers - as price-setting and any form of collusion will

What are the important functions to maximize total surplus, What are the im...

What are the important functions to maximize total surplus? The market equilibrium maximizes total surplus since the market performs four significant functions are as follows:

Explain variations in geographic immobility, Wage Differentials: Market str...

Wage Differentials: Market structure alone does not account for all of the differences in wages and employment. Market wage differentials arise from various other sources, includin

Bls classify people who are not in the labor force, How does the BLS classi...

How does the BLS classify people who are "not in the labor force," and what people are often in this category?  If an individual surveyed (that is, who is age 16 or over and no

Ricardian model - production possibilities frontier, Suppose there are two ...

Suppose there are two countries (home and foreign) and that two goods can be produced within those countries: machinery (M) and bread (B). Marginal product of labor (MPL) is given

Miroeconomics, when the demand function is 2Q-24+3P=0,find the marginal rev...

when the demand function is 2Q-24+3P=0,find the marginal revenue when Q=3.

Theory of production and cost, 1.A firm producing Golf sticks has a prod...

1.A firm producing Golf sticks has a production function given by Q=2v(K L) In the short run, the firm’s amount of capital equipment is fixed at k = 100. The rental rate for k

Income and substitution effects, Income and Substitution Effects A fall...

Income and Substitution Effects A fall in price of a good has the two effects: Substitution & Income -Substitution Effect Consumers will tend to buy more of the good

Technical economies, Technical Economies: They are economies that acc...

Technical Economies: They are economies that accrue from the use of large machines with emphasis on full utilization and efficiency in production. First, there are some equip

Demand function, Demand Function The function capturing the dependent ...

Demand Function The function capturing the dependent relationship between the price people are willing to pay for products or service and other factors related to that product

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd