4.1 - Current Account: Surplus

Question 1

What are the long term causes of a current account surplus?

Answer 1

Surplus savings > Investment
Significant competitive advantage
Rising global export prices
Trend rise in factor productivity

Question 2

What are the short term causes of a current account surplus?

Answer 2

Depreciation of exchange rate
Consumer export demand
Cyclical terms of trade improvement
Falling essential import costs
Rising net inflows

Question 3

What are the consequences of a persistent current account surplus?

Answer 3

Currency appreciation
Foreign asset ownership
Reduced domestic consumption
Possibility increased protectionism

Question 4

How is currency appreciation a consequence of a persistent surplus?

Answer 4

Exports cheap + rise
Currency demand rises
Harms domestic producers + employment

Question 5

How is foreign asset ownership a consequence of a persistent surplus?

Answer 5

Financial account deficit
Domestic investors demand foreign assets
Results in net outflow of capital

Question 6

How is reduced domestic consumption a consequence of a persistent surplus?

Answer 6

Large proportion of output exported
Less for domestic consumers
Export revenue not spent on imports

Question 7

How is protectionism a consequence of a persistent surplus?

Answer 7

Foreign govts. unhappy with trade imbalance
May impose protectionist measures
Undermines surplus nation’s comparative advantage
Reduces employment + output

Question 8

What are the consequences of a persistent current account deficit?

Answer 8

Currency depreciation
Foreign ownership of domestic assets
Higher interest rates
Rising indebtedness

Question 9

How is currency depreciation a consequence of a persistent deficit?

Answer 9

Import demand > Export demand
Little demand for currency
Imports expensive + CPI

Question 10

How is foreign asset ownership a consequence of a persistent deficit?

Answer 10

Account balance
Capital account in surplus
Domestic assets owned overseas > Foreign assets owned domestically

Question 11

How is a higher interest rate a consequence of a persistent deficit?

Answer 11

Central Bank raise IR
Offsets inflationary effects of weak currency
Attracts foreign capital - strengthens currency

Question 12

How is indebtedness a consequence of a persistent deficit?

Answer 12

Run financial surplus
Foreign investors purchase bonds
Increases foreign debt
Govt interest burden
Reduces domestic spending