Current Account of the Balance of Payments

A deficit or surplus affects GDP, employment, inflation and the exchange rate, and neither is automatically good or bad.

Consequences of a deficit

• GDP and employment. Spending on imports rather than home-produced goods means lower demand for domestic output, which can reduce GDP and raise unemployment.
• The exchange rate. A persistent deficit raises the supply of the currency on the FX market (residents selling it to buy imports), which tends to cause the currency to depreciate.
• Inflation. The effect works both ways. That same leakage of spending abroad takes demand out of the economy, easing demand-pull pressure on prices. But the depreciation a persistent deficit tends to cause makes imported food, fuel and raw materials dearer, adding to cost-push (imported) inflation. Which effect dominates depends on how far the currency falls and how import-dependent the economy is.
• Financing the gap. The country must cover the deficit by borrowing from abroad or selling assets, building up debt and interest payments. A large, prolonged deficit can become hard to finance.

A deficit is not always harmful: if it arises because firms are importing capital goods that will raise future output, it can support long-run growth.

Consequences of a surplus

• GDP and employment. Strong net exports raise demand for domestic output, supporting GDP and employment.
• Inflation and the exchange rate. Strong export demand can add to demand-pull inflation, and the surplus tends to push the currency up, which can later reduce competitiveness.
• Living standards and trade relations. A surplus means more goods leave the country than come in, and those exports could have been consumed at home; trading partners running matching deficits may also complain or retaliate.