Persistent Current Account Surpluses (HL IB Economics)

Implications of a Persistent Current Account Surplus

• A persistent current account surplus occurs when a country consistently exports more goods/services than it imports

• The implications of this occurring can be summed up as follows 

1. Rising consumption and investment

• Investment increases as exporting firms are making excellent profits

• With a higher level of profits in the economy, domestic income rises leading to an increase in consumption 

2. Appreciating Exchange Rates

• With higher exports, foreigners demand more of the local currency to pay for their goods/services leading to currency appreciation

• Appreciating exchange rates make the economy less desirable as a destination for foreign direct investment 

3. Both an inflationary and deflationary effect on price levels
 

• The net effect on inflation will depend on the extent to which domestic firms rely on imported raw materials used in their production process 

4. Employment

• With rising demand for exports, unemployment usually falls as exporting industries require more workers

• Rising profits usually result in increased investment which may mean that even more workers are required

• Decreasing unemployment creates a higher average domestic income and much of this income is spent domestically

  • Non exporting domestic industries may also require more workers to help meet the rising domestic demand 

5. Export competitiveness

• Appreciating exchange rates associated with a persistent surplus, will gradually erode the nation's export competitiveness over time

• The extent to which this is eroded will depend on the price elasticity of demand for the country's exports

  • if PED for their exports in inelastic,  then currency appreciation will not impact the competitiveness as much as it does when the PED for exports is elastic