Current Account Surplus

• Current account surplus

  When the value of exports exceeds the value of imports
• Causes of a current account surplus

  • Demand side causes:
  • High incomes abroad (boom in major trading partners)
  • Low incomes at home (reduces demand for imports)
  • Weak exchange rate (imports more expensive, exports cheaper)

  Supply side causes:

  • Low relative inflation (exports more competitive)
  • Low unit labor costs (exports more competitive)
  • Strong investment (exports more competitive)
  • Gains in comparative advantage
  • New resource discoveries
• Current account surplus

  Increases aggregate demand (X-M increases)
• Current account surplus

  Leads to upward pressure on exchange rate (currency appreciates)
• Current account surplus

  Country must run a financial account deficit to balance the balance of payments
• Country with large current account surplus

  May use protectionism or exchange rate manipulation, leading to retaliation and trade wars
• Large current account surplus could be a sign of an unbalanced economy, over-reliant on exports with insufficient domestic consumer spending