Macroeconomics - Surplus or balance on the current account of the balance of payments

Current account on the balance of payments

where all exports and imports are recorded

Balance of payments

record of all transactions relating to international trade

current account deficit

when the value of imports exceeds the value of exports. The money flowing out of the economy is greater than the money flowing in. The current balance will be negative

current balance

difference between total exports and total imports (visible and invisible)

current account surplus

when the value of exports exceeds the value of imports. the money flowing into the country is greater than the money flowing out. The current balance will be positive

visible trade

exchange in physical goods e.g. wheat, leather goods, cars, jewellery

invisible trade

exchange in services e.g. tourism, financial services, shipping goods

exchange rate

the price of one currency in terms of another

the relationship between the current account and exchange rates 1

If a country’s exchange rate gets stronger (one unit of one currency can buy more units of another currency) exports become ore expensive and imports become cheaper. results in fewer exports being sold and more imports being bought. this will have a negative impact on the current account

the relationship between the current account and exchange rates 2

May have an impact on the exchange rate. e.g. if a country has a surplus on the current account from rising sales of goods abroad- demand for that country’s currency will rise. The increase in demand for a currency can drive up the exchange rate. Therefore that country’s exchange rate gets stronger

Exchange rate example

£1 = $1.30

£1 = 1.20Euros

Quality of Domestic goods - Reasons for deficits and surpluses

If a country develops a reputation for high quality goods it is likely to enjoy rising sales from overseas buyers. This will drive up the demand for exports and help to improve the current account balance

Quality of foreign goods

If goods and services made in another country are better quality then people are more likely to by foreign goods. This will increase the demand for imports and decrease the demand for exports