Current Account Surplus- Causes and Consequences

Question 1

What are demand-side causes of a current account surplus?

Answer 1

High foreign incomes → more demand for exports

Low domestic incomes → reduced demand for imports

Weak domestic currency → cheaper exports, costlier imports

Low inflation → makes exports more competitive

Question 2

What are supply-side causes of a current account surplus?

Answer 2

Strong investment in productivity and technology

Discovery of natural resources

Gains in comparative advantage

Competitive labour costs (e.g. low wages)

Question 3

How can a current account surplus affect aggregate demand (AD)?

Answer 3

A surplus means X > M, so net exports are positive, boosting AD, GDP growth, and employment.

Question 4

What inflationary effects can a surplus cause?

Answer 4

Rising demand for domestic goods may lead to demand-pull inflation, especially if the economy is near full capacity.

Question 5

How does a surplus affect the exchange rate?

Answer 5

Sustained surpluses lead to increased demand for the currency, causing currency appreciation.

Question 6

How can a surplus affect the financial account?

Answer 6

A current account surplus means the country is lending to the rest of the world, so the financial account goes into deficit (net capital outflows).

Question 7

Can a current account surplus be a sign of imbalance?

Answer 7

Yes — it can reflect under-consumption, weak domestic demand, or over-reliance on exports, especially in economies like China or Germany.

Question 8

When might a surplus be a problem?

Answer 8

If driven by low domestic demand

If it causes global trade imbalances

If it invites trade tensions or retaliation