A persistent current account surplus occurs when a country consistently exports more goods, services, and capital than it imports. While this might seem beneficial, it can lead to various economic implications.
NoteA current account surplus occurs when the credits in the current account are greater than the debits.
Low Domestic Consumption and Investment
- Persistent surpluses often indicates low domestic consumption and lower standards of living because the domestic production is greater than the domestic consumption.
- The current account surplus means there is a financial account deficit.
- This could lead to a risk in insufficient domestic investment as funds are leaving the country.
- This limits the level of economic growth.
Exchange Rates - Appreciation
- The current account surplus places an upward pressure on the currency value, appreciating the currency, which causes lower exports and higher imports.
- This can lower the economic growth rate since there is a lower aggregate demand.
Low Inflation
- The reduced aggregate demand due to the current account surplus puts a downward pressure on demand-pull inflation, reducing the inflation rate.
