What does a current account surplus in the Balance of Payments signify for an…

Concept

The Balance of Payments (BoP) is the systematic record of every economic transaction between the residents of a country and the rest of the world over a period. It is split into a current account, which records the flows of goods, services, net income and net transfers, and a capital and financial account, which records lending, borrowing and other changes in external assets and liabilities.

The current account balance is the receipts on those flows minus the payments on them. When receipts exceed payments the account is in surplus; when payments exceed receipts it is in deficit.

Application to this question

1. Trade in goods and services is by far the largest component of the current account, so its receipts are chiefly the value of exports and its payments are chiefly the value of imports. Net income and net transfers make up the remainder and are usually a small fraction of the total.

2. The standard definition therefore compares the two sides directly. NCERT describes an excess of imports of goods, services and transfers over exports of goods, services and transfers as a current account deficit, so a surplus is the converse case, in which exports exceed imports.

3. Read this way, a current account surplus signifies that the open economy is selling more goods and services abroad than it is buying from abroad: the country is exporting more goods and services than it is importing.

Which account records what

Contrast and cross-check

• Importing more goods and services than exporting gives payments greater than receipts, which is a current account deficit, the opposite sign of the same balance.

• Heavy borrowing from foreign countries is not a current account entry at all. Loans and other external funds are recorded in the capital and financial account, and such borrowing usually accompanies a deficit that has to be financed from abroad.

• Low borrowing from foreign countries can be a consequence of a surplus, because a surplus country is a net lender that accumulates claims on the rest of the world. The current account balance is measured from the flows of goods, services, net income and net transfers, however, and not from the amount a country borrows, and a country can be a net lender while still borrowing large gross amounts abroad.

• Strictly speaking the comparison covers net income and net transfers as well, so a large enough net inflow of income or remittances could in principle produce a surplus alongside a goods-and-services deficit. Standard sources treat those items as usually a small fraction of the total and describe a current account surplus as exports of goods and services exceeding imports, which is the reading this question uses.

Cross-check by writing the balance as CA = (X - M) + net income + net transfers, where X and M are exports and imports of goods and services. With the income and transfer terms small, CA greater than zero corresponds to X greater than M, which matches the answer.