The Asian Development Bank Institute was established in 1997 in Tokyo, Japan, to help build capacity, skills, and knowledge related to poverty reduction and other areas that support long-term growth and competitiveness in developing economies in Asia and the Pacific. Is a current account surplus a good thing. Weak domestic consumption. We find some marginal positive effects on regional and global growth emanating from a positive shock on the UK current accounti.e., a reduction in the deficit. The issue I have with this: Australia doesnt produce the same goods as we import. But, in general, the government doesnt label the current account balance as good or bad. What does a positive current account surplus mean? We examine the regional and global growth effects of current account imbalances in Japan, Germany, and the Peoples Republic of China (PRC)the three largest persistent surplus countriesand the United States and United Kingdom, the two largest persistent deficit countries. Andrey knows everything from warm-up to hard workout. China, too, came under international pressure for helping to cause global imbalances. Read about the reasons for surplus and its economic impact. Current account surplus shocks emanating from the People's Republic of China, Japan, and Germany have strong positive effects on regional growth. When the balance on current account is negative, spending for goods and services that flows out of the country exceeds spending that flows in, and the economy has a current account deficit (i.e., net exports are negative in our simplified analysis). The Australian dollar has no such special status and that country has been running more sizeable deficits than the US over the same time period. Tension between the United States and China about which country is primarily responsible for the trade imbalance between the two has thrown the spotlight on the broader consequences for the international financial system when some countries run large and persistent current account deficits and others accumulate big surpluses. With time, such countries will become debtors to other countries or international banks. Take the US and Australia, whose current accounts as a percentage of GDP since 1980 are in the chart below. But is this necessarily bad? One point that the savings-investment balance approach underscores is that protectionist policies are unlikely to be of much use in improving the current account balance because there is no obvious connection between protectionism and savings or investment. Controlling for a set of macroeconomic determinants, we use a structural vector autoregression framework to show that positive shocks to current account balances in the PRC, Germany, and Japan transmit positive regional and global growth effects, particularly in the case of spillovers to regional growth from Japan. The current account deficit in Pakistan, as recorded in December 2021, was 7.6%, different from that in November, which was recorded at 7.3%. On the other hand, a current account deficit driven by a sustained rise in domestic investment can be viewed as the good type in the longer run, if the investments earn a high return (e.g., worthwhile public infrastructure projects or high-tech manufacturing plants). Julius Probst is indirectly funded by the Wallenberg Foundation. What is current account deficit and surplus? . Asia, as a whole, still runs a decent current account surplus with the rest of the world. This year we are quite certain that we will get a surplus of 1.5 percent of gross domestic product (GDP), next year if the economy recovers faster and households have more confidence about the future then you would expect them to mark savings rates down, said Chinoy. How to Calculate and Countries With It, Commodity Pairs: Currency Correlations Explained, Net Exports: Definition, Examples, Formula, and Calculation, Current Account Balance (BoP, Current US$). It is different from the current account balance in the following ways: i-Trade surplus is a narrow concept as it includes only a part of the current account. Merchants dreamed of new sources for goods such as gold and spices. Australia clearly has enough space to build more and more real estate to keep financing its imports. If you continue to use this site we will assume that you are happy with it. What is Balance of Payment Surplus? Current Account Deficit (CAD) is the shortfall between the money received by selling products to other countries and the money spent to buy goods and services from other nations. Manufactured product exportersgenerallyfollow a policy of mass-market productionlike Chinaor have a reputation for top quality, like Germany, Japan, and Switzerland. But we can also think of intertemporal tradeimporting goods today (running a current account deficit) and, in return, exporting goods in the future (running a current account surplus then). A country with a current account surplus will have a deficit on the financial/capital account. Japan has high overseas investment, and its fruit returns to Japan as interest and dividends, and therefore this contributes to a Primary Account surplus. The current account can also be expressed as the difference between national (both public and private) savings and investment. Impact on growth. On the other hand, current account deficits in the Philippines and Indonesia are of the good type. These economies are struggling with domestic structural headwinds, ranging from rapidly ageing populations, high sensitivity to rate hikes, to low productivity growth. What Is Trade Surplus? F&D welcomes comments and brief letters, a selection of which are posted under Letters to the Editor. Nothing unusual in that, of course: many economic crises are associated with such deficits. Balance of payments surplus occurs when a countrys total exports are higher than its imports. (See also, Balance of Payments.) Currency War: Definition, How It Works, Effects, and Example, Current Account Balance Definition: Formula, Components, and Uses, Why China Buys U.S. Debt With Treasury Bonds, How US Interest Rates Move the World Economy. The figure also is called the balance of trade. Sajjid Chinoy, Chief India Economist at JPMorgan, Samiran Chakraborty, Chief Economist India at Citi and Ananth Narayan, professor of Finance at SP Jain Institute of Management and Research (SPJIMR) discussed in detail. The government cant change the amount of exports or imports companies and people buy (trade balance). There are several points at issueincluding what a current account deficit or surplus really means and the many ways that a current account balance is measured. If it imports less than it exports, that creates a trade surplus. Is a current account surplus good or bad? What happens to a country with a continuous balance of payment deficit? What is the opposite of current account deficit? Why a trade deficit is bad? Related to Current account surplus: Capital account surplus current account n. The component of a nations balance of payments that includes the price of imports and exports, investment income, and unilateral transfers (such as gifts from foreigners). They are also open economies, highly dependent on exports and, therefore, very exposed to the rising risk of an export slump, because of worsening trade protectionism, slowing growth in China and the global electronics cycle turning down. This revenue can then be used on a range of functions across society to improve peoples standard of living. Normalizing the data, by dividing the budget balance by GDP, enables easy comparisons across countries and indicates whether a national government saves or borrows money. Yet what about Australia? The country might even lend outside its borders. Is a current account surplus good or bad? There can be consequences when the amount a country spends abroad is wildly different from what it receives from the outside world, One big yard sale (photo: John Van Hasselt/Sygma/Corbis). What are the pros and cons of open source software? : a situation in which a country sells more to other countries than it buys from other countries : the amount of money by which a countrys exports are greater than its imports. Let's start with my point: the current account balance is neither 'good' nor' bad'. Your textbook will have a whole list of these. How many deaths are caused by flu each year? A current account deficit may therefore reflect a low level of national savings relative to investment or a high rate of investmentor both. The trade surplus is bad because: The current trade surplus may come at the expense of future growth. But a country that has a current account surplus will have extra foreign exchange resources that it can invest in other countries. Foreigners who hold onto dollars and never use them are essentially trading real consumer goods for green pieces of paper, which is actually a net gain for American consumers. Read more. Americans buy foreign goods with American dollars, which are then transferred to foreign account holders. The current account surplus in Japan, for example, is caused by low domestic demand as well as the competitiveness of its exports and has led to stagflation and low wage growth. Another way to look at the current account is in terms of the timing of trade. Creative Commons Attribution-NonCommercial-NoDerivs 3.0 IGO License. What does a surplus on the balance of payments indicate? Instead, I would focus on the consequences of the current account balance. What are the consequences of current account surplus? When a country has a current account surplus, it is exporting capital to the rest of the world. These include white papers, government data, original reporting, and interviews with industry experts. Therefore, the country invests additional funds abroad. A current account surplus is, generally speaking, a good thing for a country, though it can put upward pressure on its currency. This is for the first time in seventeen years that India has posted a current account surplus. A trade deficit can be beneficial to countries that import heavily and simultaneously invest in economic development. All information, opinions and estimates expressed in the content are current as of the date of publication, are subject to change without notice, and may become outdated over time. The balance of payments (BOP) is a statement of all transactions made between entities in onecountry and the rest of the worldover a defined period of time. By clicking Accept All Cookies, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. Write an article and join a growing community of more than 158,000 academics and researchers from 4,538 institutions. In 1839, Britain invaded China to crush opposition to its interference in the countrys economic and political affairs. Trade deficits are the difference between how much a country imports and how much it exports. Indias current account deficit is of the bad type for a different reason: the excess of investment over saving is small relative to Turkey, but both the domestic investment and saving ratios have been in a secular decline since 2012, which bodes poorly for long-term potential growth. This is because the government has limited control over the factors that drive the current account balance. Essentially Australia could shrink its savings-investment gap. This weak demand leads to lower consumer spending and lower spending on imports. Common sense suggests that if a country fritters away its borrowed foreign funds on spending that yields no long-term productive gains, then its ability to repayits basic solvencymight come into question. Large and continuous deficits or surpluses can either be totally benign or the result of some underlying economic problem. Expressed this way, a current account deficit often raises the hackles of protectionists, whoapparently forgetting that a main reason to export is to be able to importthink that exports are good and imports are bad.. A continual balance of payment deficit will make a country end up as a consumer nation. Asias current accounts: The devil is in the details. Below is the result for Current Account Balance plotted against RGDP growth for 423 country years. Overview. How a country can run an overall balance of payments deficit or surplus? Current vs. Capital Accounts: What's the Difference? Damocles: Our early warning indicator of exchange rate crises, https://www.nomuraholdings.com/policy/terms.html. 11 What did China have that Europe wanted? The current account deficit can be considered too large, if it hits around 6 plus per cent of GDP.). Exports, earnings on investments abroad, and incoming transfer payments (aid and remittances) increase a country's current account surplus. The Spanish, along with other European nations, had a great desire for Chinese goods such as silk and porcelain. (Okay, I'll clarify. A current account surplus leads to the net accumulation of foreign assets. Good or Bad? A common complaint about economics is that the answer to any question is, It all depends. It is true that economic theory tells us that whether a deficit is good or bad depends on the factors giving rise to that deficit, but economic theory also tells us what to look for in assessing the desirability of a deficit. Subscriber Services - Subscribe to ADB's Newsletter, e-Alerts and RSS feeds. The current account is an important indicator of an economys health. If the trade balance is improving, Australians may be purchasing fewer imports. Indonesia and South Africa are two more emerging markets whose current account balances have been shifting. As expected, the global growth response is lower in magnitude than the regional growth response. Whether this is socially desirable is a different question, of course. 10 When did Europe start trading with China? The irony, of course, is that in all probability it will achieve precisely the opposite. August 2018, nomura.com Updated Jun 25, 2019. Why does Japan have a current account surplus? Just as a country may import one good and export another under intratemporal trade, there is no reason why a country should not import goods of today and export goods of tomorrow. Yet US economic growth has been comparable or better than that of many other large economies for much of this period. The Trump administration has initiated several tariff measures with a goal of reducing the trade imbalance. He also edits and writes articles for the IronSet blog where he shares his experiences. Why China Buys U.S. Debt With Treasury Bonds, How US Interest Rates Move the World Economy, National Debt: Definition, Impact, Key Drivers, Current U.S. Debt, Republican and Democratic Approaches to Regulating the Economy. A trade surplus is harmful only when the government uses protectionism. A current account surplus is a positive current account balance, indicatingthat a nation is a net lender to the rest of the world. It is true that a net inflow of capital represents growing liabilities to foreigners. Thus, the IMF projects Asia's current account surplus to shrink to 1.8% in 2019 from 2.7% in 2015. Take Korea for example, domestic saving ratios are high due to the aging populations building a nest egg for retirement and limited investment opportunities for companies. Indeed, the standard economics calculation for gross domestic product (GDP) initially suggests that any current account deficit reduces GDP, making the U.S. poorer. From the above current account identity, we can see that a large current account deficit driven by a sharp fall in the gross domestic savings is often the bad type for longer-run growth prospects, as it signals that the countrys foreign liabilities are being used to finance domestic consumption, with little prospect of generating future returns to repay these foreign debts. When Dwight Eisenhower gave the Atoms for Peace speech what constructive use of nuclear energy was he introducing? For capital-poor developing countries, which have more investment opportunities than they can afford to undertake because of low levels of domestic savings, a current account deficit may be natural. The current account balance is primarily the difference between a countrys total exports and imports of goods and services, usually measured as a share of GDP. At the same time, nations saw trade as a way of increasing their wealth. Is a current account surplus good or bad? Phone system devices including smartphones, Asia: US$7.326 trillion (41.7% of globally exported products). Countries with consistent current account surpluses face upward pressure on their currency. Weak domestic consumption. While Chinas trading position has now swung almost towards being balanced, it still has a substantial surplus with the US, which explains Donald Trumps recent trade war with Beijing. A deficit then means that the country is importing more goods and services than it is exportingalthough the current account also includes net income (such as interest and dividends) and transfers from abroad (such as foreign aid), which are usually a small fraction of the total. When done right, they can let trading partners specialize in their strengths and create wealth for all consumers. A balance of payment deficit in a country can arise if said country imports more capital, goods and services than it exports. Since then they have shot up to $501 billion. Very poor countries typically run large current account deficits, in proportion to their gross domestic product (GDP), that are financed by official grants and loans. This is because solvency requires that the country be willing and able to generate (eventually) sufficient current account surpluses to repay what it has borrowed to finance the current account deficits. What are the effects of balance of payment surplus? Please send your letters to fanddletters@imf.org, Receive emails when we post new The opinions expressed in the content do not constitute investment advice and independent advice should be sought where appropriate.The content contains general information only and does not take into account the individual objectives, financial situation or needs of a person. The US has been running persistent deficits for almost the entire period. What is the meaning of surplus balance of trade? A large current account deficit driven by a sharp fall in the gross domestic savings is often the bad type for longer-run growth prospects. Russia posts record current account surplus of $227 billion in last year Story first published: Wednesday, January 18, 2023, 16:41 [IST] Other articles published on Jan 18, 2023 Surpluses tend to be reported as good or healthy, while deficits are often regarded as bad. Conversely, a more flexible policy frameworksuch as a flexible exchange rate regime, a higher degree of openness, export diversification, and coherent fiscal and monetary policiescombined with financial sector development could help a country with persistent deficits be less vulnerable to a reversal by allowing greater room for better shock absorption. The key is what is driving them. The government can control how much it borrows from overseas, but it cannot control how much private companies borrow from overseas (this affects the size of capital inflows and then the net primary income balance as a result). I wouldnt think of it as having specific pros and cons. Why is it bad to import more than export? Key Takeaways The current account may be positive (a surplus) or negative (a deficit); positive means the country is a net exporter and negative means it is a net importer of goods and services. When a country experiences a current account surplus its currency will? The Asian financial crisis was a series of currency devaluations and other events that spread through many Asian markets beginning in the summer of 1997. If NPY is shrinking, Australia has a greater stock of domestic funds (as these funds are not needed to service foreign debt). Who is the new host of Dancing with the Stars? This could boost domestic savings and allow more projects to be funded domestically WITHOUT the need for foreign borrowing. The current account balance is primarily the difference between a country's total exports and imports of goods and services, usually measured as a share of GDP. Measuring the current account There are several points at issueincluding what a current account deficit or surplus really means and the many ways that a current account balance is measured. The country is currently exporting capital of more than 250 billion a year to the rest of the world, helping to finance unstable imbalances elsewhere, while Germanys infrastructure seems to be in dire need of additional funding. A balance of payments deficit may cause a loss of confidence by foreign investors. If you continue to use the site, we will assume that this suits you. A current account surplus means that a country has more exports and incoming payments than imports and outgoing payments to other countries. For more information please go to https://www.nomuraholdings.com/policy/terms.html. Why is a current account surplus equivalent to foreign investment? The US, they say, has only been able to run one for so long because of the unique role of the US dollar as the international reserve currency. Use the balance of trade to compare a countrys economy to its trading partners. An undervalued currency, on the other hand, boosts exports and makes imports more expensive, thus increasing the current account surplus or narrowing the deficit. Many pundits, politicians and even some economists bemoan the trade deficit and say that it is better for Americans to consume their own products rather than buy products from abroad. You can also see my video for help. Lower import spending may mean people are spending more on domestic goods rather than buying foreign goods. Because the trade balance generally has the largest impact on the current account balance, nations with large and consistent current account surpluses tend to beexporters of manufactured products or energy. Some economists believe that the long-term imbalances in the world economy that were partly thanks to Americas deficits caused the financial crisis and the great recession that followed. 12 What drug did the British trade with China? Unfortunately, just like a banking panic, currency crises and financial contagion are usually unpredictable beforehand. Does it matter how long a country runs a current account deficit? What does trade surplus mean in economics? The last time India's current account turned positive was in the March quarter of 2006-07. October 2018. These current account surplusesfinance current account deficitsin other nations. Until February 2019 China was the largest trade partner of the United States, and currently is in third place after Canada and Mexico while it remains the biggest source of imports. The significant trade shock that emerged amidst the economic recovery process was the reason behind the deficit being $9.09 billion against the surplus of $1.25 billion for the same period in 2020. (Current account + capital account receipts) < (current account + capital account payments). Andrey is a coach, sports writer and editor. A useful lens through which to view current account balances is the GDP accounting identity: (Y=GDP or income, C=consumption, I=investment, G=government spending, X=exports and M=imports). Consequently, it is a net lender. An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit or narrowing the surplus. Surpluses tend to be reported as "good" or "healthy", while deficits are often regarded as "bad". Still, some people persist in seeing only the bad in deficits. Merchandise exports in April and May shrank 47.5% while imports fell 54.7%, leading to a trade deficit of $9.9 billion against a $30.7 billion deficit a year ago. You wont see ScoMo on the news talking about how only his government can achieve a current account surplus (CAS). A countrys current account balance, whether positive or negative, will be equal but opposite to its capital account balance. As explained previously in 'The Current Account Reflects the Saving-Investment Relationship' a current account surplus reflects either a low investment rate relative to GDP or a high savings rate, or a combination of the two. James Chen, CMT is an expert trader, investment adviser, and global market strategist. Net Exports and International Finance Another way to see this is on the flip side of the cur-rent account, which is called the capital account. Why is a current account surplus equivalent to foreign investment? About ADB, how were organized, transparency, Projects, publications, products and services, operational priorities, and development knowledge, Countries with operations and subregional programs, country planning documents, Careers, business opportunities, and investor relations. But, in general, the government doesn't label the current account balance as 'good' or 'bad'. For instance, if a country is struck by a shockperhaps a natural disasterthat temporarily depresses its ability to access productive capacity, rather than take the full brunt of the shock immediately, the country can spread out the pain over time by running a current account deficit. Exports, Income received from foreign investments, & Transfers received. The current account can be expressed as the difference between the value of exports of goods and services and the value of imports of goods and services. | Atish Ghosh is an Assistant Director in the IMFs Research Department and Uma Ramakrishnan is a Deputy Division Chief in the IMFs Strategy, Policy, and Review Department. In terms of positive consequences of a CAD? A sudden economic stop is an abrupt reduction in net capital flows into an economy. Ironically, while large current account surpluses have insulated Northeast Asia from the EM turmoil, they are mostly bad types and not a positive sign in terms of long-run growth potential. Admired for its stability but derided for persistent trade surpluses, the good and bad in Germany's economic model are strongly linked. Surpluses tend to be reported as. Current account surpluses refer to positive current account balances, meaning that a country has more exports than imports of goods and services. Capital flows can rapidly reverse as foreign lenders abruptly start withdrawing their money. Lets think about this from the trade balance and then net primary income (NPY). A surplus may boost economic growth in the short term. If the trade balance is improving, Australia is selling more exports which is increasing GDP and the governments revenue. Turkeys domestic investment-to-GDP ratio jumped to 32% this year from 28% in 2016, but it has all the hallmark signs of misallocation, including rapid credit growth, high inflation and surging property prices, along with negative growth in total factor productivity and weak gross FDI inflows. Sajjid Chinoy, Chief India Economist at JPMorgan, Samiran Chakraborty, Chief Economist India at Citi and Ananth Narayan, professor of Finance at SP Jain Institute of Management and Research (SPJIMR) discussed in detail. This could lead to greater purchases of domestically produced goods (maybe) which could boost GDP. What are the causes of balance of payment deficit? Theme Blog Forever by. Turning to surplus countries, while a current account surplus helps to strengthen the exchange rate and reduce dependency on external finance, demographic factors underpinning a surplus and falling levels of investment can be negative for domestic long-run growth. Balance of Payments in Global Transactions: Why Does It Matter? However, this is an overly simplistic assumption. Top 20 economies with the largest surplus. A positive value implies a trade surplus, a negative trade balance implies a trade deficit. World Bank. Surplus current account means that the rest of the world owes India money in rupees, meaning they would buy rupee and sell foreign currencies, leading to an appreciation of the rupee value.