Current Account Surplus

Definition

A current account surplus occurs when the value of a country's exports of goods, services, and net income from abroad exceeds the value of its imports. This results in a positive balance of payments, indicating that the country is a net lender to the rest of the world.

5 Must Know Facts For Your Next Test

1. A current account surplus indicates that a country is a net creditor to the rest of the world, as it is lending more funds than it is borrowing.
2. A current account surplus can be used to acquire foreign assets, such as stocks, bonds, or real estate, or to pay down existing foreign debt.
3. Countries with a persistent current account surplus may face pressure from trading partners to appreciate their currency, which can make their exports less competitive.
4. A current account surplus can be influenced by factors such as exchange rates, relative prices, and the competitiveness of a country's exports.
5. Maintaining a sustainable current account surplus is often a policy goal for countries, as it can provide economic stability and increase a country's influence in the global economy.

Review Questions

• Explain how a current account surplus is calculated and its relationship to a country's balance of payments.
  • The current account surplus is calculated as the difference between a country's exports and imports of goods, services, and net income from abroad. It represents the net flow of funds between a country and the rest of the world. A current account surplus indicates that the country is a net lender, as its exports and net income from abroad exceed its imports, resulting in a positive balance of payments. This surplus can be used to acquire foreign assets or pay down existing foreign debt.
• Describe the potential consequences of a persistent current account surplus for a country's economy and its trading partners.
  • A persistent current account surplus can lead to a country accumulating significant foreign assets and becoming a net creditor to the rest of the world. This can give the country more influence in global financial markets and increase its economic and political leverage. However, it may also lead to pressure from trading partners to appreciate the country's currency, which can make its exports less competitive. Additionally, a large current account surplus can contribute to global imbalances and tensions, as it may be seen as an unfair trade practice by other countries.
• Evaluate the factors that can influence a country's current account surplus and discuss the potential policy implications for maintaining a sustainable surplus.
  • A country's current account surplus can be influenced by a variety of factors, including exchange rates, relative prices, the competitiveness of its exports, and the savings-investment balance. Policymakers may aim to maintain a sustainable current account surplus as a means of providing economic stability, increasing a country's influence in the global economy, and acquiring foreign assets. However, persistent and large surpluses can also lead to tensions with trading partners and contribute to global imbalances. Policies to address these issues may include exchange rate adjustments, investments in improving export competitiveness, and measures to encourage domestic consumption and investment.

Related terms

Balance of Payments: The record of all economic transactions between a country and the rest of the world, including trade in goods and services, financial flows, and unilateral transfers.

Trade Deficit: A situation where a country's imports of goods and services exceed its exports, resulting in a negative balance of trade.

Net Exports: The difference between a country's exports and imports, representing the net contribution of the external sector to the country's GDP.