Boosting productivity to improve net exports

Steps:

• Current account deficit occurs when imports exceed exports plus net income/transfers.
• Reducing it requires boosting exports, curbing imports, or both via structural improvements.
• Infrastructure spending enhances productivity, lowering production costs and making exports more competitive.
• This shifts the trade balance toward surplus, directly addressing the deficit.

Why B is correct:

• Per the balance of payments identity, higher productivity increases export supply and reduces import dependence, narrowing the current account gap (CA = X - M + net transfers).

Why the others are wrong:

• A: Cutting subsidies raises domestic costs, reducing export competitiveness and potentially widening the deficit.
• C: Higher interest rates attract capital inflows but appreciate the currency, making exports costlier and imports cheaper, worsening the current account.
• D: Removing tariffs lowers import barriers, increasing import volumes and exacerbating the deficit.

Final answer: B