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Unprecedented Current Account Surplus Boosts Economic Optimism

Current Account Surplus definition

A nation has a current account surplus when its exports are higher than its imports. The nation provides more products to the world and is owed funds in return.

A country’s finances are reflected in a simple income statement of revenue and expenses and a simple balance sheet of assets and liabilities. When a country’s revenue, from what one sells, is greater than one’s expenditure, there is positive net income, which leads to one’s assets to rise relative to one’s liabilities (most importantly debt, which raises one’s net savings.

A country’s net income is defined by its export earnings minus import spending (balance of goods and services) that makes the net income of a country that comes from trading with foreigners.

If one buys more than one sells, he has to finance the difference by some mix of drawing down one’s savings and/or borrowing. One can think of a country’s savings as its foreign-exchange reserves.

The United States finances its deficits by running down its reserves/savings and building a lot of debt that is owed to foreigners. The United States has the largest current account deficit.

The four countries with the largest current account surplus are Germany, China, Japan and South Korea.

The current account is the sum of the following components:

  1. Net Exports (Exports minus Imports): the difference between exports and imports is called the trade balance of net exports. A trade deficit is defined when imports are greater than exports. If exports are greater than imports this is called a trade surplus
  2. Net income from abroad: Net income from abroad is cash flows received from abroad minus cash flows sent aboard. Cash flows can be from: investment income and service transactions
  3. Net current transfers: Net current transfers include foreign aid and pensions.

 A current account surplus indicates that a country is increasing its claims on foreign assets.

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