Causes of a deficit and surplus on the current account

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  • Created by: Jade
  • Created on: 07-01-13 17:24

Causes of a deficit on the current account

A deficit on the current account occurs when the country's expenditure abroad exceeds its revenue from abroad.

Reasons: Country's inhabitants have spent more on imports than overseas have spent on the country's products or there has been a net outflow of investment income. 

Changes in income home and abroad 

  • If incomes are falling abroad, demand for the country's exports is likely to fall.
  • A rise in incomes at home would also contribute to a deficit - spend more on products - some of these may be imports.

Changes in the exchange rate 

A rise in exchange rate - raises export prices, lowers import prices. 

Structural problems - countries charging too much for their products, producing poor quality products or not picking up on changes in demand - the deficit may persist. 

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Causes of a deficit - outflow of investment income

Outflow of investment income 

This will occur if the investments that foreign residents have made in the country EARN MORE than investments the country's inhabitants have made in other countries.

Whether this happens will be influenced by a number of factors:

  • Relative volume of investments made 
  • Level of profit, interest and dividends earned on the investments. 
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Causes of a surplus on the current account

A surplus on the current accout is experienced when a country's revenue from abroad is greater than its expenditure abroad. 

It may occur due to:

  • The country's revenue from exports exceeding expenditure on imports.
  • Country is a net earner of investment income 
  • Surpus may arise from the strength of an economy, change in exchange rate. 
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Causes of a surplus

Country is likely to have a surplus if:

  • Its products are of a high quality 
  • Produced at low cost 
  • Reflect what households and firms at home and abroad want to buy
  • A fall in the exchange rate can also give rise to a surplus, for atleast a time - lowers export prices, raises import prices 
  • May be a surplus in a recession - a country's inhabitants may not be buying many products, including imports, and its firms, finding difficult to sell at home, may be competing more vigorously in export markets. 
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