QUESTION TWO

The financial markets and international institutions like the IMF put pressure on countries with prolonged and sizeable current account deficits to implement corrective policies and adopt structural changes.

(a) Explain these corrective policies and structural changes.

(3 marks)

(b) Countries like Poland, Hungary and the Czech Republic have run current account deficits for almost two decades until recently. However, in recent years the current account balances have turned into surpluses for each country. Based on the experiences of these countries, identify the policies and structural changes you wrote in part (a) that eventually generate current account surpluses. (3 marks)

(c) Briefly explain to assess a country's external balances why one should look at both the balance of payments and the international investment position accounts.

(3 marks)

(d) Briefly explain why countries like the UK, Australia and New Zealand have not had to implement corrective policies despite their almost four decades-long and sizable current account deficits.

(2 marks)