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Consequences of current account deficit and surplus

Economics notes

Consequences of current account deficit and surplus

A current account deficit occurs when a country's total imports of goods, services, income, and transfers exceed its total exports. A current account surplus, on the other hand, occurs when a country's total exports exceed its total imports. Both deficits and surpluses have consequences for economies and can impact exchange rates, economic growth, and external borrowing. A persistent current account deficit may indicate an imbalance in trade and competitiveness, reliance on foreign borrowing, and potential vulnerability to external shocks. A current account surplus may reflect a competitive export sector, strong foreign investment, or saving excesses. Understanding the consequences of current account deficits and surpluses helps policymakers, businesses, and individuals assess a country's external position, manage risks, and develop strategies to promote sustainable trade balances and economic stability.

What are the consequences of a current account deficit?

Consequences of a current account deficit can include a decreased currency value, increased foreign debt, and potential imbalances in the economy.

How does a current account surplus impact domestic industries?

A current account surplus can impact domestic industries by potentially leading to an appreciation of the domestic currency, making exports relatively more expensive and imports cheaper, affecting competitiveness.

What are the effects of current account imbalances on the economy?

Current account imbalances can have various effects on the economy, including impacting exchange rates, trade competitiveness, domestic production and employment levels, and potentially leading to adjustments in savings and consumption patterns.

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