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Consequences of a financial account deficit / surplus

Again - not on the syllabus so included briefly for completeness and interest

S:\triplea_resources\DP_topic_packs\business management\student_packs\media_ops_management\images\outsourcing_global.jpgA surplus on the financial account means that there are more investment funds flowing into the country than flowing out. These inflows may be to fund a deficit on the current account of the balance of payments.

Inward investment may help create jobs and boost growth, but anyone investing in an economy expects a return. Therefore, a surplus on the financial account will lead to outflows of interest and dividends in the future, thus affecting the balance on current account.

Any inflow of funds may exert an upward pressure on the exchange rate, as the demand for the domestic currency will increase. This may adversely affect the current account if the increase in export prices makes exports less competitive.

A financial account deficit, on the other hand, will mean a net outflow of investment funds. As a result, the country is building up a portfolio of overseas investments, which may lead to future returns of interest, profit and dividends. This may be beneficial in the medium-term. However, short term speculative outflows of funds may have disastrous effects on an economy in terms of the depreciation of the exchange rate, loss of confidence, impact on investment, output and jobs. Some countries have been badly affected by these speculative outflows of funds