Economics help. Current account deficit/surplus +ve/-ve Watch

abcdefghijklmnopqrstuvwxyz
Badges: 14
Rep:
?
#1
Report Thread starter 9 years ago
#1
What are the benefits and negatives of a current account deficit.
What are the benefits and negatives of a current account surplus.

Thanks
0
quote
reply
Student#1
Badges: 0
Rep:
?
#2
Report 9 years ago
#2
Current account deficit shows that the economy is in a bad shape. Imports are more than Exports. This leads to inflation, higher demand, and lower exchange rate.

Current account surplus results in the opposite. Higher currency value, Investment opportunities, and Improves the GDP.
0
quote
reply
PorcineAviation
Badges: 12
Rep:
?
#3
Report 9 years ago
#3
(Original post by Student#1)
Current account deficit shows that the economy is in a bad shape. Imports are more than Exports. This leads to inflation, higher demand, and lower exchange rate.

Current account surplus results in the opposite. Higher currency value, Investment opportunities, and Improves the GDP.
You're pretty much entirely wrong.

Deficit on the current account indicates imports of goods exceeds exports of good. This is the only thing you got right.

It doesn't indicate the economy is in bad shape, it doesn't cause inflation (it has deflationary effects too with a flexible exchange rate), it doesn't "lead to" higher demand.

If it did "lead to" higher demand, this would cause an increase in output, but you say surplus causes that. You've contradicted yourself.

I encourage you not to answer people's question with falsities.
1
quote
reply
Student#1
Badges: 0
Rep:
?
#4
Report 9 years ago
#4
(Original post by Benh842)
You're pretty much entirely wrong.

Deficit on the current account indicates imports of goods exceeds exports of good. This is the only thing you got right.

It doesn't indicate the economy is in bad shape, it doesn't cause inflation (it has deflationary effects too with a flexible exchange rate), it doesn't "lead to" higher demand.

If it did "lead to" higher demand, this would cause an increase in output, but you say surplus causes that. You've contradicted yourself.

I encourage you not to answer people's question with falsities.

I think you are completely wrong, and I don't understand why you are posting with 'falsities'.

If there is current account deficit, it shows there is more imports then exports, which will NOT increase the GDP of the country. With imports, the prices WILL go up (In most cases) due to lack of supply, and as a consequence, there will be cost-push inflation.

With more of the currency put in the market FOR imports, the exchange WILL go down.
0
quote
reply
maxzara
Badges: 1
Rep:
?
#5
Report 9 years ago
#5
Current account deficit (X-M) is -ve, then it results in a reduction in GDP. As output is measured as Y=C+G+I+(X-M)

It's also likely to cause depreciation of domestic currency, as demand for foreign goods is higher than that for domestic going the other way.
The opposite is implied. Current account surplus is actually the reason the Chinese have invested all their money into treasuries, stimulating demand for the dollar effectively devaluing their currency.
0
quote
reply
PorcineAviation
Badges: 12
Rep:
?
#6
Report 9 years ago
#6
(Original post by Student#1)
If there is current account deficit, it shows there is more imports then exports, which will NOT increase the GDP of the country. With imports, the prices WILL go up (In most cases) due to lack of supply, and as a consequence, there will be cost-push inflation.

With more of the currency put in the market FOR imports, the exchange WILL go down.
You said a deficit causes an increase in demand. An increase in demand would increase GDP. You've changed your mind?

The answer is: a deficit doesn't cause an increase in demand.

Who said anything about a lack of supply? A deficit doesn't imply a lack of supply, it implies foreign goods are comparatively cheaper than domestic goods. This could purely be due to the exchange rate. There isn't any cost-push inflation.

High imports imply high demand for foreign currency, and thus the exchange rate of the domestic currency falls. At least you got something right.
0
quote
reply
PorcineAviation
Badges: 12
Rep:
?
#7
Report 9 years ago
#7
(Original post by maxzara)
Current account deficit (X-M) is -ve, then it results in a reduction in GDP. As output is measured as Y=C+G+I+(X-M)

It's also likely to cause depreciation of domestic currency, as demand for foreign goods is higher than that for domestic going the other way.
The opposite is implied. Current account surplus is actually the reason the Chinese have invested all their money into treasuries, stimulating demand for the dollar effectively devaluing their currency.
Don't forget they were pegged for years.

And a depreciation of domestic currency is neither a positive or negative factor, so it's not relevant to the OP's question.
0
quote
reply
PorcineAviation
Badges: 12
Rep:
?
#8
Report 9 years ago
#8
And to clarify, the presence of a deficit itself doesn't cause a reduction in output. An increase in the deficit causes a reduction in output.
0
quote
reply
PorcineAviation
Badges: 12
Rep:
?
#9
Report 9 years ago
#9
(Original post by Student#1)
When you import goods from a foreign country obviously there will be a higher demand than it would be if it was domestically produced, and the demand is a consequence of lower supply (again would be greater if it had been produced domestically)
This is just utter drivel.

Why is there "obviously...higher demand" when you import? IT JUST MEANS A CERTAIN GOOD IS RELATIVELY CHEAPER ABROAD.

DEMAND IS NOT A CONSEQUENCE OF SUPPLY.
0
quote
reply
PorcineAviation
Badges: 12
Rep:
?
#10
Report 9 years ago
#10
(Original post by Student#1)
Erm!?!? So by what you say, lower supply wont lead to higher demand?

Well, don't really know what else to say.. :shifty:
Of course lower supply doesn't cause higher demand. Do you know anything about economics?

If supply falls, demand-supply equilibrium moves to a point of higher price, and lower quantity. The demand does not change. At all.
0
quote
reply
PorcineAviation
Badges: 12
Rep:
?
#11
Report 9 years ago
#11
(Original post by Student#1)


I am going to leave this thread, I don't see the point in discussing economics with someone who clearly doesn't respect other's view / answer.
It scares me you can look at that graph and still think you're right. Read the label for the x-axis. I'll give you a clue (it doesn't include the words demand or supply).
0
quote
reply
PorcineAviation
Badges: 12
Rep:
?
#12
Report 9 years ago
#12
My good deed for the day...




I illustrate a fall in supply. Note the demand curve hasn't moved. It's in the same place, despite supply falling. Quantity falls, price rises. Demand stays the same.

(Original post by Student#1)
Have you ever seen or worked on a supply-demand curve before
Yeah, I'm a 2nd year Economics student at one of the best universities for Economics in the world. Yourself?
0
quote
reply
PorcineAviation
Badges: 12
Rep:
?
#13
Report 9 years ago
#13
(Original post by Student#1)
I agree with your diagram, and what you have said. But at a price say P1, there is a shortage in the supply than what is demanded isnt it? (lower price than the equilibrium).

I am not a economics university student, no. But I know the economics basics, obviously not at your level though.

if you can read my posts except previous one, I always had a tone of wanting to know, but you obviously were bit harsh on your way of giving your view on something, or correcting someone.

No, at (P1, Q1) there is not a shortage of supply, assuming you mean a deficit. It's the new market equilibrium. The price has risen as a result of the fall in supply, and now there are less people willing to pay that higher price for the good, and as such demand once again equals supply and the market is balanced.

To be fair, if you're still learning, you shouldn't be answering other people's questions on here until you know for sure what you're telling them is true.

EDIT: I don't know why you've included that diagram; that's illustrating a forced excess of demand through a price limit.
0
quote
reply
Student#1
Badges: 0
Rep:
?
#14
Report 9 years ago
#14
(Original post by Benh842)
No, at (P1, Q1) there is not a shortage of supply, assuming you mean a deficit. It's the new market equilibrium. The price has risen as a result of the fall in supply, and now there are less people willing to pay that higher price for the good, and as such demand once again equals supply and the market is balanced.

To be fair, if you're still learning, you shouldn't be answering other people's questions on here until you know for sure what you're telling them is true.

yes, but at the SAME price, there is a supply deficit right?

and wouldn't this, then rise the price level to meet the equilibrium?

My idea was correct, and so was my first post in this thread, but after that I guess I wasn't able to explain precisely.

Sorry if I had pissed you off in anyway. I am sure you would know better than I would do in this field, since you study it at a much higher level.
0
quote
reply
PorcineAviation
Badges: 12
Rep:
?
#15
Report 9 years ago
#15
(Original post by Student#1)
yes, but at the SAME price, there is a supply deficit right?

and wouldn't this, then rise the price level to meet the equilibrium?

My idea was correct, and so was my first post in this thread, but after that I guess I wasn't able to explain precisely.

Sorry if I had pissed you off in anyway. I am sure you would know better than I would do in this field, since you study it at a much higher level.
At a macro level, you could reasonably assume 'sticky prices' in the short-run (see Keynes), but this in its very nature prevents inflation as well as price fluctuations. And ultimately, in the medium/long-run, prices will correct themselves.
0
quote
reply
Student#1
Badges: 0
Rep:
?
#16
Report 9 years ago
#16
(Original post by Benh842)
At a macro level, you could reasonably assume 'sticky prices' in the short-run (see Keynes), but this in its very nature prevents inflation as well as price fluctuations. And ultimately, in the medium/long-run, prices will correct themselves.

I will read about them. Thanks.
0
quote
reply
X

Reply to thread

Attached files
Write a reply...
Reply
new posts
Latest
My Feed

See more of what you like on
The Student Room

You can personalise what you see on TSR. Tell us a little about yourself to get started.

Personalise

University open days

  • University of Lincoln
    Brayford Campus Undergraduate
    Wed, 12 Dec '18
  • Bournemouth University
    Midwifery Open Day at Portsmouth Campus Undergraduate
    Wed, 12 Dec '18
  • Buckinghamshire New University
    All undergraduate Undergraduate
    Wed, 12 Dec '18

Do you like exams?

Yes (169)
18.51%
No (556)
60.9%
Not really bothered about them (188)
20.59%

Watched Threads

View All
Latest
My Feed