A Level Economics Essay 12: Current Account Evaluation

 Evaluate the view that a current account surplus is always beneficial to an economy.

The view that a current account surplus is always beneficial to an economy may not be valid and depends on various factors. While a current account surplus can bring certain advantages, it is not necessarily always beneficial. Let's evaluate this view by considering both the advantages and potential drawbacks:

Advantages of a current account surplus:

1. Increased savings and investment: Germany, known for its current account surplus, has a high savings rate. This surplus of savings allows Germany to invest in research and development, infrastructure projects, and education, which contributes to its strong economic performance and technological advancements.

2. Foreign investment and capital inflows: China has experienced significant capital inflows as a result of its current account surplus. Foreign investors have been attracted to China's growing economy and have invested in various sectors, such as manufacturing, technology, and services, contributing to China's rapid economic expansion.

3. Strengthened financial position: Japan has historically maintained a current account surplus and accumulated substantial foreign reserves. These reserves have helped Japan weather economic downturns, provide stability to its financial system, and enhance its reputation as a reliable borrower in international markets.

Drawbacks of a current account surplus:

1. Currency appreciation and reduced competitiveness: Switzerland's persistent current account surplus has led to significant appreciation of the Swiss franc. This has made Swiss exports more expensive and challenged the competitiveness of industries like manufacturing, tourism, and watchmaking.

2. Declining domestic demand: Germany's heavy reliance on exports and its current account surplus have resulted in relatively low levels of domestic investment and consumption. This has led to criticisms that Germany's surplus comes at the expense of its domestic economy, limiting domestic demand and hindering the development of certain industries.

3. Imbalance in trade relationships: China's large current account surplus has triggered concerns from its trading partners, particularly the United States. The perceived unfair trade practices, such as intellectual property theft and currency manipulation, have strained trade relationships and prompted trade disputes between the two countries.

4. Missed investment opportunities: Japan's persistent current account surplus has been accompanied by relatively low levels of domestic investment. Critics argue that Japan should allocate more resources toward domestic sectors like innovation, entrepreneurship, and renewable energy to enhance long-term growth prospects.

These real-world examples demonstrate that while current account surpluses can bring benefits, they also present challenges. It is crucial for policymakers to carefully manage and address the implications of sustained surpluses to ensure a balanced approach to economic growth and development.