International economics

Table of Contents

1. Topic pack - International economics - introduction
2. Section 3.1 International trade (notes)
3. Section 3.1 International trade (questions)
4. Section 3.1 International trade - simulations and activities
5. Section 3.2 Exchange rates (notes)
6. Section 3.2 Exchange rates - questions
7. Section 3.2 Exchange rates - simulations and activities
8. Section 3.3 Balance of payments - notes
   1. BOPs - introduction
   2. Credits and debits
   3. Current account
   4. Capital account
   5. Financial account
   6. Relationship between accounts
   7. Balance of payments - calculation
   8. Current account & floating exchange rate
   9. Current account & fixed exchange rate
   10. Balance of payments problems
   11. Consequences of deficit / surplus
   12. Policies to correct a balance of payments disequilibrium
   13. Consequences of a financial account deficit / surplus
   14. Marshall-Lerner condition
9. Section 3.3 Balance of payments - questions
10. Section 3.4 Economic integration - notes
11. Section 3.4 Economic integration - questions
12. Section 3.5 Terms of trade - notes
13. Section 3.5 Terms of trade - questions
14. Print View

Consequences of deficit / surplus

A current account deficit, or surplus, will have serious consequences on an economy if they are sustained in the long-run.

Current account deficit

A current account deficit is generally thought to be undesirable (particularly in the long-run). In a sense, it is advantageous as the deficit means that the country is enjoying a higher standard of living in the short-term. This is thanks to the higher level of consumption through imports. However, the deficit is being funded by inflows of investment and this will mean interest and dividend payments flowing out of the country in the future. This inward investment also leaves the country more exposed to the whims of external investors. The greater the deficit, and the longer it lasts, the more of an issue this will be.

So, consider the question, "Does a deficit on a country's balance of payments on current account represent an economic problem?" Note down some points and then follow the link below to compare your answer with ours.

Does a current account deficit matter?

Current account surplus

A current account surplus is less of an issue than a deficit, but it does mean that the country may not be enjoying as high a standard of living as it might. Therefore, a current account surplus may be seen as an indication of under-performance.

A current account surplus, under a floating exchange rate system, is likely to exert upward pressure on the exchange rate, with all the problems, which that may cause.