Deficits & Surpluses (Cambridge (CIE) IGCSE Economics): Revision Note

Current account deficits and surpluses

• A current account deficit occurs when the value of imports exceeds the value of exports

  • This means the country is spending more on foreign goods, services and income transfers than it is earning

Causes of current account deficits

1. Relatively low productivity

• When a country’s firms are less efficient, their production costs are higher than firms in other countries

  • This makes exports more expensive and less competitive in global markets

  • For example, in the early 2010s, Greece struggled with low productivity, contributing to its large trade deficit and debt crisis

2. Relatively high exchange rate

• A strong currency makes exports more expensive to foreign buyers and imports cheaper for domestic consumers

  • As a result, export sales fall and imports rise

3. Relatively high inflation

• Higher domestic inflation increases the prices of goods and services to foreigners

  • Exported goods become more expensive than those from countries with lower inflation, causing demand to fall

  • At the same time, domestic consumers may switch to cheaper foreign goods, raising imports

  • For example, in the early 2000s, Zimbabwe experienced hyperinflation, destroying export competitiveness and leading to a reliance on imported essentials

4. Rapid economic growth

• When household incomes rise quickly, people tend to buy more goods and services — including foreign products

  • This increase in import spending can worsen the current account balance.

• For example, in India, periods of rapid growth have often been accompanied by widening trade deficits due to surging demand for imported oil, electronics and luxury goods

5. Non-price factors (e.g. poor quality or design)

• Even if a product is affordable, poor quality or outdated design can lead to falling export sales

• Domestic consumers may also prefer to buy higher-quality imports

  • For example, some developing economies struggle to increase exports due to inconsistent product quality while importing higher-quality goods from countries like Germany or Japan

Causes of current account surpluses

• A current account surplus occurs when the value of exports exceeds the value of imports

  • This suggests the country is a net earner from trade and income flows

Consequences of deficits and surpluses

• In the global economy, trade is a net-sum game

  • The total value of global exports equals the total value of global imports

• This means that when one country runs a Current Account surplus, another must be running a Current Account deficit

Consequences of a Current Account deficit

1. Increasing unemployment

• A fall in demand for domestically produced goods and services leads to lower output

  • As a result, fewer workers are needed, and unemployment rises

2. Slower economic growth or recession

• Exports are a major component of real GDP

  • A sustained fall in exports can slow down economic growth or even push the economy into recession

3. Lower standards of living

• With falling growth and rising unemployment, wages may fall and households will have less to spend

  • This leads to a decline in living standards

4. Increased borrowing

• Persistent deficits, especially those caused by high import levels, may force a country to borrow more to fund its spending on foreign goods and services

5. Depreciating exchange rate

• A weaker current account leads to depreciation of the national currency

  • While this can eventually boost exports, it also makes imports more expensive, raising the risk of cost-push inflation

Consequences of a Current Account surplus