Compare the Effectiveness of Supply Side and Fiscal Policies to Correct Deficits on a Country’s Current Account of the Balance of Payments

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A current account deficit means the country imports a greater value of goods and services than it exports. To reduce a current account deficit we need to either increase the value of exports and or reduce imports. Supply side policies aim to increase the productivity of the economy. If the manufacturing sector becomes more productive, the relative cost of British goods will fall and therefore they will become more competitive. This will help increase exports and reduce the current account deficit. For example, the government could increase spending on education and training. Vocational training schemes may help increase labour productivity because workers will have more skills. A more productive workforce can improve the competitiveness of UK exports. Alternatively, the Government could introduce a free market supply side policy such as reducing the power of trades unions. If unions are powerful, productivity may be lower due to frequent strikes and disruptive working practises such as working to rule. If union power is reduced it helps reduce time lost to strikes, increases labour market flexibility and therefore should help increase UK exports. A third supply side policy could be increasing labour mobility. The nature of the UK housing market means that it is often difficult for workers to move to areas where jobs are available. Greater provision of cheaper rented accommodation would make the labour market more flexible and help increase the competitiveness of firms. The problem of supply side policies is that they will take time to have effect. For example, spending on education and training may take several years before the effects are noticed. Also, there is no guarantee that education spending may actually increase labour productivity, especially if the money is misspent or the workers don’t want to learn. Also in the UK, trades unions
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