hi everyone a slightly more advanced look now at the consequences of a current account deficit I've already made a video on this before but something will simplify this is more advanced so country is suffering from a current account deficit why is that potentially a problem well one it could well lower aggregate demand in the economy most likely it will do because what is the biggest component of the current account it's the trade balance so chances are if a country has a current account deficit they probably have a negative trade balance deficit in their trade balance which implies that X minus M net exports in the aggregate demand equation is negative which is pulling down 80 which is reducing ad a sure on the dollar and as ad shifts to the left that meets another growth in the economy leads to higher unemployment in the economy very negative side effects there so that's one major issue of negative consequence of it now what we learnt in my video on the balance of payments the detail understanding is that countries that have current account deficits will often finance them by running financial account surfaces and the easiest way to control a financial account surface is to just issue more debt is to borrow from the rest of the world self government bonds sell corporate bonds sell company shares that's just borrowing money from the rest of the world and as you rack up lots and lots of debt people that actually buy the step from you will start maybe to lose confidence in the country's ability to pay that debt back so if you keep increasing your current account deficit and the way you finance it is by issuing lots of debt eventually investors will think well these guys are not really taking me seriously they keep issuing loads and loads of debt and what's not to lose confidence in these guys paying that money back to us and therefore if investors sought to pull away from buying debt in this country has a current account deficit then all of a sudden a worry start to come into into people's mind thinking oh my god we can't actually finance his current account deficit where is our money going to come from you know we don't have an actual income stream here and as fear it kind of comes into the economy that this economy may want default on its debt more and more people move their money away from the country which will mean selling that currency maybe the powdered is in the UK that has a large current account deficit fine as well as the borrowing sell the pound that reduces the value of the pound leads to a massive currency crisis in the country people that have debt that have savings that have money held in the UK will see it lose value and therefore they'll move that money from UK even more which will lead to an even worse depreciation of the power and overall you get to have massive currency crisis which can lead to an overall massive financial crisis economic crisis in the UK or in a country that's suddenly now can't finance its current account deficit that's a big issue if the current account deficit balloons out of proportion if investors start to feel that the current account deficit is getting so high that actually this country can't really pay it back I can't pay money back that is actually issuing in terms of debt then you could well see a currency crisis that might be occurring there are fears at the moment in the UK speaking in 2015 that our current account deficit is actually running so high that we can't actually finance it sustainably by issuing debt and there are worries that if we keep increasing current account deficit if you financially by issuing debt that we can whilst here currency crisis in the UK and also a consequence of the current account deficit is that can it can actually put downward pressure on the exchange rate directly think about it logically if a country is actually importing more than it's actually exporting so selling more of its currency to buy foreign goods and foreign assets then it's actually selling to the rest of the world then overall the supply of the crop of the car we'll be increasing so that will push the supply of the currents of the currency to the rival shift supply of the currency to the right so let's take the UK that has a large current account deficit we take the price it pounds in million dollars to the pound dollar exchange rate supply the card will be increasing the net imports to the UK will be more than the neck sport which will increase supply the power put downward pressure on the exchange rate of the pound and in theory you might think well that one actually partially correct a current of deficit because of Witek and you should not be worried with it from my previous videos with with a with with a weaker exchange rate exports become cheaper imports become more expensive in theory that should help increase the level of exports increase the demand for X was and reduce the demand for imports yet potentially correcting a current account deficit but the problem is if the country's got a current account deficit in the first place that could be a sign of a lack of competitiveness in which case just by making exports cheaper there is no guarantee that that is actually going to lead to a sudden increase in export demand so for a country like the UK who doesn't have a big exporting base a weaker exchange rate is unlikely to correct the current account deficit what's more like likely to occur is that the UK suffers from higher import prices higher raw material prices firms that need to import more materials will suffer from higher costs and the chances are could be dist activation and increasing costs of production for firms increasing inflation and reducing growth at the same time so the countries that suffer don't have a very strong exporting base a weak forex trader it's not really going to be helpful it's just going to harm the economy with potential stagflation so these are the big issues with having a current deficit in theory if the current account deficit is a very small proportion of GDP then financing it by issuing debt is not that much of an issue to be honest with you the issue comes when the current account deficit balloons at a proportion it becomes a very large percentage UTEP then you start to get into big issues especially number two year and that's the most severe consequence if the debt burden is seem to be out of control a potential currency crisis and then economic crisis is a huge negative consequence of having a large current account deficit banks watching guys see y'all next time