A current account deficit occurs when a country imports more than its exports.

This can lead

to a flow of domestic currency out of the country, which can have impacts on economic
growth. Expenditure- switching policies are designed to change the relative prices of exports
and imports. It helps to balance current account by altering the composition of expenditure
on foreign and domestic goods.
One type of expenditure switching policy is protectionism. For example, increased tariffs and
quotas can reduce imports expenditure and make domestic output more price competitive.
Domestic subsidies can help switch spending on imports towards domestic goods instead.
However, protectionism invariably leads to retaliation. Therefore, the current account deficit
can become worse by imposing tariff as exports revenues may potentially fall more.
Additionally, there can be a loss of efficiency. This is because domestic producers are
protected by tariffs, as a result, there is no incentives to cut costs which then leads to low
competitiveness.
Another type can be to weaken the exchange rate. An exchange rate depreciation means
that imports become more expensive and improve price competitiveness of exports. In
theory, there will be more demand for exports and less demand for imports. This improves
the trade balance in the current account. Government achieves this by selling more currency
to reduce the value of currency, lower interest rate to incentive hot money to leave the
country, use QE to pump more money into the economy. However, the Marshall- lerner
conditions states that a currency depreciation will only correct a current account deficit if
PED for exports plus PED for imports is greater than 1. This means that depreciation is
effective when demand for imports and exports elastic. On the other hand, the J curve effect
suggest that in the short run, demand for imports and exports tends to be inelastic.
Therefore, after a devaluation, the current account can get worse before it gets better. In the
long run, demand becomes more price elastic, and the current account improves. Another
problem with devaluation is that it leads to inflation. Improvement in (X-M) causes AD curve
to shift to the right. The increase in import prices can lead to a left shift in SRAS curve as
imported raw materials become more expensive. As a result, price level moves from p1 to
p2. The use of expenditure switching policies conflicts with other economic objectives.
Overall, expenditure switching policies can be useful tools to correct current account deficit,
but there is no guarantee that a depreciation will improve a country’s external trade
performance. Its effectiveness depends on other variable factors.