Unit 4: Current Account - Surplus Vs Deficit

The table below shows the trade balances for eight countries. They are ranked in order from the country whose trade deficit makes up the largest percentage of its GDP  to the country whose trade surplus makes up the largest percentage of its GDP. The blue bars represent the value of the deficit or surplus of each nation. Try and think about the questions that follow this diagram.

Discussion Questions:

1. Identify and define the four components of a nation’s current account balance.
2. According to the data, which three countries are the most import dependent? Which three countries are the most export dependent? Which country has the most balance trade in goods and services? Which has the most imbalanced trade?
3. For one of deficit countries above, answer the following two questions:
   1. Assuming its currencies’ exchange rates is floating, explain how persistent current account deficits will affect a country’s exchange rate over time?
   2. Summarize and explain the likely effects of a current account deficit on the following: a) the financial account balance, b) domestic interest rates, and c) national debt.
4. For one of the surplus countries above, answer the following two questions:
   1. Assuming its currencies’ exchange rates is floating, explain how persistent current account surpluses will affect a country’s exchange rate over time?
   2. Summarize and explain the likely effects of a current account surplus on the following: a) domestic savings rates, b) the financial account balance.
5. What are the various methods a country can take to reduce a current account deficit? What is the benefit of having a balanced current account as opposed to a large deficit or surplus?