Evaluate the disadvantages of a current account deficit

Edexcel International A-Level Economics Unit 4 January 2026 A

In 2023 the current account deficit on the balance of payments in South Africa was $6.14bn and in Argentina it was $21.5bn. Evaluate the disadvantages of a current account deficit. Refer to a country of your choice in your answer. (20 marks)

Plan

• Paragraph 1
  • Argument: CA deficit slows down economic growth
  • Diagram: AD shifting left
  • Evaluation: X-M is only a small % of AD
• Paragraph 2
  • Argument: CA deficit causes currency deprecation
  • Diagram: demand and supply of curency
  • Evaluation: depends if deficit is structural/cyclical

A current account deficit occurs when there is more money leaving the country than entering in a given year. The current account includes trade in goods, services, primary income and secondary income. An equilibrium on the current account is one of the main macroeconomic objectives for many countries.

One disadvantage of a current account deficit is that it can slow down economic growth. A current account deficit occurs when the value of imports is greater than the value of exports. Net exports (X-M) is one of the determinants of aggregate demand, which is the total planned spending in the economy. If the UK experiences a current account deficit, there would be a decrease in the value of (X-M) and therefore a left shift in the AD curve. The diagram below shows that the outcome is a decrease in output from y1 to y2. This suggests there would be a fall in real GDP (negative economic growth) and also an increase in unemployment. This is because demand for labour is derived from the demand for goods and services, which is now lower due to a fall in demand for UK exports and also a fall in consumer spending (as consumers are buying more imports instead). An increase in unemployment is damaging as it means that more people have low or no disposable income and this can lead to an increase in inequality and a fall in living standards.

However, in the UK, consumer spending (C) is the largest determinant of aggregate demand (around 60%) so a fall in net exports would not have a significant impact on aggregate demand as long as consumer spending remains high. A trade deficit could be a sign that the UK economy is actually experiencing economic growth which suggests there are low levels of umemployment and high levels of disposable income among consumers. This means that UK consumers increase their demand for luxury goods such as travel, or cars. It is still important that the government monitors the current account deficit. It is possible that high imports and a lack of exports also signals poor competitiveness, meaning that our goods and services are too costly, making this a structural issue.

Another issue with a persistent current account deficit is that it can cause a currency depreciation, which can cause further problems of its own.

A-Level Economics Tutoring

I offer one-to-one and small group A-Level Economics tutoring for students across the UK and internationally. With 87+ five-star Google reviews and tutoring experience since 2017, I specialise in helping students understand difficult concepts and improve their exam technique.