What Is a Current Account Surplus?
A current account surplus is a positive current account balance, indicatingthat a nation is a net lender to the rest of the world. A current account surplus can be contrasted with a current account deficit.
A country's current account surplus compared to its Gross Domestic Product (GDP) provides strong measure of a country's international competitiveness.
Key Takeaways
- Current account surpluses refer to positive current account balances, meaning that a country has more exports than imports of goods and services.
- Countries with consistent current account surpluses face upward pressure on their currency.
- Current account surpluses can also indicate low domestic demand or may be the result of a drop in imports due to a recession. 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.
Understanding Current Account Surplus
The current account measures a country's imports and exports of goods and services over a defined period of time, in addition to earnings from cross-border investments and transfer payments.Exports, earnings on investments abroad, and incoming transfer payments (aid and remittances) are recorded as credits; imports, foreign investors' earnings on investments in the country, and outgoing transfer payments are recorded as debits.
When credits exceed debits, the country enjoys a current account surplus, meaning that the rest of the world is in effect borrowing from it.A current account surplus increases a nation's net assets by the amount of the surplus.
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. Manufactured product exportersgenerallyfollow a policy of mass-market production—like China—or have a reputation for top quality, like Germany, Japan, and Switzerland.
Current Account Surplus Across the World
In 2021, according to the World Bank, the 12 countries with the largest current account surpluses were China, Germany, Japan, Russia, the Netherlands, South Korea, Switzerland, Norway, Singapore, Ireland, Australia, and Italy.These current account surplusesfinance current account deficitsin other nations.
Note
The U.S. has the largest deficit by far, followed by the United Kingdom, India, and Brazil.
A nation with consistent current account surpluses may face upward pressure on its currency. Such nations may take steps to stem the appreciation of their currencies in order to maintain their export competitiveness. Japan, for instance, has frequently intervenedin the foreign exchange market when the yen rises by buying large amounts of dollars in exchange for yen.
Current Account Surplus As a Negative Indicator
Current account surpluses are generally considered a positive sign in an economy. However, in some cases, they are also negative indicators. Japan's current account surplus, for example, is as much due to low domestic demand as it is to its competitiveness in exports. The low domestic demand has translated to stagflation in its economy and low wage growth. Current account surpluses can also be the effect of a recession, when domestic demand dips and imports are curbed if a currency is depreciated.
Is a Current Account Surplus a Good Thing?
A current account surplus means that a country has more exports and incoming payments than imports and outgoing payments to other countries. It is generally deemed a positive because the current account surplus adds to a country's reserves.
What Increases and Decreases a Current Account Surplus?
Exports, earnings on investments abroad, and incoming transfer payments (aid and remittances) increase a country's current account surplus. Imports, foreign investors' earnings on investments in the country, and outgoing transfer payments lower a country's current account surplus.
Who Has the Largest Account Surplus?
As of 2021, China had the largest current account surplus at $317 billion, according to the World Bank.
The Bottom Line
A current account surplus is, generally speaking, a good thing for a country, though it can put upward pressure on its currency. It may be indicative of higher domestic demand for domestic products, which can help employment. However, it may also mean lower consumer spending and reduced domestic demand on imports, which can harm employment. But a country that has a current account surplus will have extra foreign exchange resources that it can invest in other countries.
