Internation+Economics

4. “Balance of payments surpluses on current account are good; deficits are bad.” Critically discuss this statement.

The balance-of-payments accounts of a country records the payments and receipts of the residents of the country in their transactions with residents of other countries. If all transactions are included, the payments and receipts of each country should be equal but unfortunately this does not happen in the real world. Any apparent inequality simply leaves one country acquiring assets in the others. For example, if Americans buy automobiles from Japan, and have no other transactions with Japan, the Japanese must end up holding dollars, which they may hold in the form of bank deposits in the United States or in some other U.S. investment. Excesses of payments or receipts, called deficits or surpluses—in particular kinds of transactions. If a country has a surplus on current account then it can have a deficit on its capital account by building up its official reserve account or by purchasing assets abroad which in both cases is a positive process. A current account surplus usually leads to an appreciation of the currency on the foreign exchange market as it implies an increase in demand for the currency. This will make imports cheaper so reducing inflationary pressures but exports will be more expensive which harms exporters.

If a country has deficit on its current account then the foreign exchange reserve must be used to increase the capital account and so to regain balance, however no country, no matter how rich and powerful, is able to fund long-term current account deficits from its reserves...It will eventually run out. A high level of buying of assets for ownership is financing the current account deficit. Foreign investors may be purchasing such thing as property which will be an inflow in the capital account however foreign ownership of domestic assets might become too great and it would be a threat to economic sovereignty.

In conclusion it is not easy to say which is good or bad but with the consequences that are listed above one could say deficit on current account is more of a burden and is more problematic than a surplus to an economy.