Despite a plunge in the value of Sterling during 2016, the UK managed to post the highest current account deficit on record. Why did the plunge in sterling not translate into a reduction in the CA deficit?

J-Curve Effect: In the short run, the fall in the value of the pound will increase the cost of importing goods and it will take time for demand to shift to domestic sources. In addition some goods cannot be produced domestically and so must be imported at the higher price. New export contracts would take time to negotiate and therefore there is the potential for the current account deficit to deteriorate significantly in the short term before improving in the long term, so-called j-curve effect. Composition of exports and imports: Services and high-end manufactured goods make-up a large portion of UK exports and these are products which often compete on a quality basis rather than a price basis and therefore the reduction in the price of these products in foreign currency terms may not have as much of a stimulus effect as if the UK was exporting goods such as clothes and consumer electronics. The proportion of our food and fuel that is imported also makes it difficult to find domestic substitutes for these goods, especially in the short term. Demand for these goods is far more inelastic than for the products that the UK exports and this means that in many cases UK consumers are far more likely to have to pay the additional cost of importing rather than having the option to forgo these goods or substitute for other goods.