The Consequences of a Deficit and a Surplus on the Current Account of the Balance of Payments
- A deficit means that a country is consuming more than it is producing.
- A deficit will reduce AD, as M (of C + G+ I + (X – M)) is increasing.
- This will lower the economy’s output, will be likely to raise unemployment, and be likely to lower the price level.
- A rise in the deficit is also likely to lead to a fall in the exchange rate.
- A surplus means that a country is producing more than it is consuming, and is hence experiencing a net inflow of money and income.
- This increase in the money supply will increase bank lending
- Aggregate demand will also increase due to increased net exports, and hence the exchange rate is likely to increase.