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Consequences of deficit / surplus HL Only!!!!

S:\triplea_resources\DP_topic_packs\economics\student_topic_packs\media_macroeconomics\images\stabilisers.jpgA current account deficit, or surplus, will have serious consequences on an economy if they are sustained in the long-run.

Remmeber: Current account deficit (Export Revenues are less than Import Expenditures)

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, if the deficit is being funded by inflows of investment, this will mean interest and dividend payments flowing out of the country in the future. If the deficit is being funded by outfows of foreign reserves then clearly the reserves will run out in the long term.

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

HL Syllabus only: Discuss the implications of a persistent current account deficit, referring to factors including:

  • foreign ownership of domestic assets,
  • exchange rates,
  • interest rates,
  • indebtedness,
  • international credit ratings and
  • demand management.

Letīs Do Some Economics

Consider and discuss the question, "Does a current account deficit matter?" 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.

Letīs Do Some Economics

If there is a current account surplus not balanced by investment deficit it must mean the foreign currency reserves are increasing. Can you describe a link between a current account surplus and Opportunity Cost in this case?