Persistent Current Account Surpluses (DP IB Economics)

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Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

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
 

ibdp-economics---implications-of-a-persistent-current-account-surplus
  • 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

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Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

Jenna Quinn

Author: Jenna Quinn

Expertise: Head of New Subjects

Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.