Explain why an increase in labour productivity is likely to reduce the deficit on the current account of the balance of payments.

A current account deficit arises when import expenditure exceeds export revenue. An increase in labour productivity implies that there is an increase in efficiency in production and also a rise in output for the same level of labour. This would cause a fall in per unit production cost, which would increase international competitiveness. A rise in competitiveness will lead to a rise in demand for goods from the UK, thus causing a rise in export revenue relative to import expenditure, thus resulting in a reduction in the current account deficit. In addition, a rise in domestic productivity will result in domestic goods being more competitive relative to imports, thus causing a rise in demand for domestic goods and a fall in the demand for imported goods. Therefore, import expenditure also decreases, further lowering the deficit.