Current account deficit and the effects on AD or AS

Current account deficit occurs when the expenditure abroad exceed the revenue from abroad. An current account consist net trade in goods and services, net investment and net transfers.

Current account deficits meant people might indicate people are spending more on imports, which is a leakage to the economy, a downward multiplier effect. As AD are made up of C+I+G+(E-M), AD would shift to the left .However, this might result supplier compete into exports market instead of domestic market since the domestic demand is low,thus AS might shift to right.It is for trade in goods, normally UK would have trade surplus in services , as UK`s promote high quality services especially in financial and business services. Which are supposed to be a injection to the economic and leads to multiplier effect that shift AD to the right. However, the net exports are deficits most of the time.

Current deficit might caused by net investment, while IPD( interest, profits and dividends) goes abroad more than come from abroad.People might not see UK a best place to set up firms and move to other country. In this case, AS would shift to left.

The net transfer might be negative, as UK government is a net contributor to EU budget. AD would shift to right as government spending is a component of AD.

Current account deficit might be mainly caused by high exchange rate, which result high price of exports and cheap imports. So according to law of demand, people tend to buy more imports than exports. AD would shift inwards if demand is elastic. For the factories that involved imports as raw material might take the advantage and increase output since the production is low. Thus, AS might shift to right.

If Current account deficit is result by the change in income for domestic or abroad. If the income at abroad is falling, they would reduce the consumption of exports which leads to AD shift inwards, but if it is income inelastic it would not have strong effect. If the income of domestic is raising, people tend to spend more and some of them would be imports if income elastic.Thus AD might not neccessary shift depends on the other conponent,such as consumer spending increased.

I think there are more to cover, but i just cannot think of>.<...