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Home > Economics FAQs Blog > Why is achieving a surplus on the current account and Balance of Payments (BoP) beneficial for the economy?

Why is achieving a surplus on the current account and Balance of Payments (BoP) beneficial for the economy?

Relevant Topics

This question pertains to topics in Macroeconomics, such as Balance of Payments, Current Account, Trade Balance

Definitions:

Balance of Payments (BoP): A summary of all transactions that a country's individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country.

Current Account: A component of the BoP that records trade in goods and services, income from abroad and current transfers.

Surplus: In the context of the BoP, a surplus occurs when the value of exports (outflows) is greater than the value of imports (inflows).

Detailed Explanation:

Achieving a surplus on the current account of the BoP means a country is exporting more goods, services, and income than it's importing. This can be beneficial for several reasons:

Increased National Income: When a country has a current account surplus, it means it's selling more to foreign countries than it's buying. This net export generates income, contributing to an increase in national income and potentially Gross Domestic Product (GDP).

Accumulation of Foreign Reserves: A current account surplus increases a country's foreign exchange reserves. These reserves can provide financial stability and enable the country to manage exchange rates more effectively.

Reduced Dependence on External Financing: A current account surplus can reduce a country's dependence on external financing. If a country regularly runs a current account deficit, it may need to borrow from other countries to finance that deficit.

Recent: 

Germany: Germany has consistently had a current account surplus, largely driven by its strong export industry, particularly in automobiles and machinery. In 2019, Germany had a current account surplus of USD 294 billion, the largest in the world. This surplus has contributed to Germany's robust economic performance, although it has also been criticised for potentially imbalancing the European economy.

Singapore: Singapore is another example of a country with a current account surplus, driven largely by its strong financial and trading sectors. In 2020, Singapore's current account surplus was SGD 86 billion. This surplus has helped Singapore accumulate substantial foreign reserves, contributing to its economic resilience.

Summary:

Achieving a surplus on the current account of the Balance of Payments is beneficial as it increases national income, builds foreign reserves, and reduces dependence on external financing. Germany and Singapore serve as real-world examples of nations that consistently run a current account surplus due to their strong export sectors.

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