Evaluate the Likely Effects on the Current Account of a Fall in Consumption, Investment and the Value of the Pound

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Current account is the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers. Exchange rate is the value of one currency for the purpose of conversion to another. Investment is when you put (money) into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit. Consumption is when you spend in order to use a resource. Firstly, if consumption falls for foreign goods then this will better the current account deficit or improve the surplus. This is because consumption falling for foreign goods means that less must be imported to the UK which is sending money abroad. Therefore, if the fall in consumption is in just foreign goods and domestic goods remains the same, then imports will reduce and exports will remain the same. As the current account is calculated using the equation ‘exports - imports’ then smaller imports will mean this equals a higher value resulting in a surplus or a reduced current account deficit. On the other hand, the fall in consumption does heavily depend on where the fall is. If the fall in consumption is for domestic goods than this will have the reverse effect. The deficit will get worse as more money is being spent on imports in comparison to exports and so the the value of exports - imports will be much lower or a negative number. A fall in investment abroad will decrease the current account deficit because the difference between what you are spending money abroad on and what you are saving is not so far apart. Less investment abroad means that more money can be spent in the UK economy which greatly effects the current account. Investing in firms situated in the UK means that they will be able to increase their production and become more efficient meaning that their prices will be more competitive and so will export more. So combing

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