Current Account Surpluses Current Account Surplus Current account

Current Account Surpluses

Current Account Surplus �Current account surplus: a nation experiences a current account surplus when the nation’s total export revenues exceed its expenditures on imports (i. e. X > M) �The consequences of a persistent surplus in a nation’s current account are the reserve of those of a deficit. They include, o Currency appreciation o Increased ownership of foreign financial and real assets o Lower overall levels of domestic consumption o Increased likelihood of protectionist policies being

Effect on the Exchange Rate �If a nation consistently sells more of its output to foreigners than it demands of foreign output, demand for the exporting nation’s currency will eventually rise and appreciate �Over time, an appreciating currency will reduce the export industry’s competitiveness with the rest of the world o This forces domestic producers to become more efficient or shut down as foreign demand for their goods eventually falls �This adjustment assumes, that exchange rates are floating and the currency is allowed to appreciate o However, in a global economy in which governments actively intervene in foreign exchange markets to devalue their own currencies, massive imbalances can persist for years

Effect on the Domestic Consumption �Persistent current account surpluses imply that households in the surplus nation are consuming at a lower level over time than households in countries with current account deficits o High levels of investment in foreign assets and large reserves of foreign exchange of the surplus act as forced savings among the surplus country’s households o A trade deficit means that the gain in present consumption may come at the expense of reduced future consumption

Evaluating the global trade imbalance �Many countries are facing significant trade imbalances, if these imbalances continue to grow larger the implication for the global economy could be severe �The are several trends that can be observed, � 1) Continued decline in secondary/tertiary sectors in the west o Some worry that the continue dependence on imports will completely wipe out any remaining manufacturing jobs in Western Europe, the US and other countries with large trade deficits o The era of globalization has been characterized by outsourcing and off-shoring jobs in both the secondary and tertiary sectors

� 2) Persisting poverty in the developing world o Persistent trade surplus for exporting nations promise continued economic growth o Export-oriented growth strategies may come at the expense of improvements in household’s standard or living if this growth is fuelled by investment abroad o Financial account deficits of these nations mean households are forced to consume less than they would if their currencies were allowed to appreciate and the current account was balanced o Increased imports to countries like China and other Asian countries may mean slower growth as their export sectors adjust to more competition from abroad

� 3) Threat to economic sovereignty o As a country incurs persistent current account deficits there is a continued increase in foreign ownership of domestic assets and a corresponding threat to economic sovereignty o Example; America’s growing financial account surplus (current account deficit) means that the following are increasingly in the hands of foreign interests, • Ownership of American corporations • Factories • Office buildings • Real estate • National debt