Consider the following actions which the Government can take: 1. Devaluing the domestic currency. 2. Reduction in the export subsidy. Which of the above action/actions can help in reducing the current account deficit?

QUESTION

Medium

Economy

Prelims 2011

Consider the following actions which the Government can take:

Devaluing the domestic currency.
Reduction in the export subsidy.

Which of the above action/actions can help in reducing the current account deficit?

Select an option to attempt

Explanation

The current account deficit is a measurement of a country's trade where the value of the goods and services it imports exceeds the value of the goods and services it exports.

Devaluation is a deliberate reduction in the value of a country's currency. Devaluing the domestic currency can help in reducing the current account deficit as it makes exports cheaper and imports more expensive, thereby reducing the deficit.

On the other hand, a reduction in export subsidy might not help in reducing the current account deficit. This is because export subsidies make exports cheaper, thereby promoting exports. If these subsidies are reduced, exports might become more expensive leading to a decrease in exports and potentially increasing the current account deficit.

Therefore, only action 1 can help in reducing the current account deficit.

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