Study notes

Development and Growth Constraints - Trade Deficits

Some countries may experience large deficits on the current account of their balance of payments

  • This means that the value of imported goods and services is greater than the value of exports and net investment incomes leading to an outflow of money from their economy.
  • High trade deficits might have to be covered by foreign borrowing (increasing external debt) or a reliance on inflows of capital investment from overseas multinationals
  • Large trade gaps can eventually lead to a currency crisis and possible loss of investor confidence. 

Capital Flight

  • Capital flight is the uncertain and rapid movement of large sums of money out of a country
  • There could be several reasons - lack of confidence in a country's economy and/or its currency, political turmoil or fears that a government plans to take privately-owned assets under state control
  • Capital flight can lead to a loss of foreign currency reserves and put downward pressure on an exchange rate – driving the prices of essential imports of goods and services higher.
  • Developing countries are estimated to have lost $5.86 trillion in 2001-2010 to illicit financial flows

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