Persistent Current Account Surpluses (DP IB Economics)
Revision Note
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
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