A current account is a balance of payments account that documents the flow of funds as a result of imports and exports of goods and services of a country. This account either has a positive balance (surplus) or a negative balance (deficit). A current account surplus means that the current account has a positive balance of payments. In other words, the exports of a country exceed the imports.
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In this article, we shall discuss at length what is current account surplus, what is its significance and more. All government exam aspirants must review the information discussed further below in the article.
What is Current Account Surplus?
Every country needs to record their inflows and outflows occurring due to trade in a particular period. The current account is a statement that records the income and expenditure of a country with other countries. It comprises the value of exports and imports of goods and services, interest, dividends and profits, unilateral receipts/or payments from/to the rest of the world. But what is the current account surplus?
When the country’s outflow is more than the inflow, meaning that the rest of the world owes more to it than what is owed by said country, it is said to have a Current Account Surplus. The surplus shows a growth in the net assets of the country (Net assets = Assets-Liabilities).
If the current account balance is positive, it shows a current account surplus. Generally, Net exports (X-M) is the main determinant of the current account balance.
Causes of Current Account Surplus
Candidates who are appearing for civil services exam should go through the causes of the current account surplus and make their UPSC notes. The current account can have a positive balance due to a multitude of reasons in the economy. Some of them are as follows-
- Depreciation of Exchange Rate- A currency is said to have depreciated when its value decreases as compared to another currency. For example, if 1 dollar was equal to 70 rupees but now it increases to 75 rupees, it is said that the value of the rupee with respect to the dollar has decreased. In such a case, it is always beneficial for exporters to export more. This causes an increase in the current account surplus.
- Trade policies- Sometimes, the government makes export policies flexible by providing subsidies and imposing stringency on import laws by implementing duties and taxes. This increases exports of the country and consecutively decreases imports, which increases the surplus in a current account.
- Economic Condition- Current account balances are affected by economic conditions prevailing in the country. In boom periods (economic expansion), imports generally increase. During a recession, import restrictions are imposed, and exports policies are liberal. It helps in generating the current account surplus.
- Inflation- When an economy is facing inflationary conditions, it will lead to an increase in interest rates which directly affects the currency in a negative way. The currency value depreciates with respect to a country that has lower inflation. Thus, when inflation is high, it is beneficial for exporters to export more. This creates a surplus in a current account.
- Domestic demand- Sometimes, due to weak domestic demand, a country may have current account surpluses. When consumer spending decreases, it causes imports to fall as well. This means that imports significantly fall when exports don’t change. The (X-M) factor increases, showing a positive current account balance.
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Significance of Current Account Surplus
Candidates who are appearing for UPSC prelims should have a brief idea about the significance of current account surplus in India-
- A current account surplus has a positive impact on the currency value (rupee). 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.
- A current account surplus leads to the accumulation of foreign assets. A country can purchase assets around the world like bonds and investments that will earn profits and dividends. This also helps in building net wealth abroad.
- There are certain negative effects of the current account surplus. Sometimes a high share of goods and services is exported outside rather than meeting the demand of the home country. This leads to a major fall in the supply side of the economy, leading to a rise in prices.
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Frequently Asked Questions on Current Account Surplus
What is BoP?
Balance of Payment (BoP) is a record of a country’s international transactions over a period of time.
What is the Current Account balance in India in Quarter 1 of 2021-22?
India’s current account has a surplus of US$ 6.5 billion in Q1 as against a deficit of US$ 8.1 billion in Q4 of 2020-21.
How is the Current Account Surplus of India calculated?
Formula= (X-M) + NI +NT,
Where, X = total Exports; M = total Imports; (X-M) = Net Exports; NI = Net Income from abroad; NT = Net current Transfers.