Which statement describes a current account surplus?

Which statement describes a current account surplus?

• A. Exports exceed imports or investment income exceeds payments; currency may appreciate
• B. Imports exceed exports; currency depreciates
• C. The current account balance is always zero
• D. There is no effect on exchange rates

Answer: (A)

A current account surplus happens when a country earns more from selling goods and services to the rest of the world than it spends on imports, or when its net investment income receipts exceed payments. In this situation the country is effectively a net lender to the world. Because there’s more demand for the country’s goods and more inflows of funds, there’s also greater demand for its currency. That can push the currency to appreciate. So the idea that exports exceed imports or investment income exceeds payments, and that the currency may appreciate, is the correct description. If imports far exceed exports, that describes a current account deficit, which typically puts downward pressure on the currency. The current account balance isn’t always zero, and exchange rates can be influenced by these balances, so saying there’s no effect on exchange rates isn’t accurate.

A current account surplus happens when a country earns more from selling goods and services to the rest of the world than it spends on imports, or when its net investment income receipts exceed payments. In this situation the country is effectively a net lender to the world. Because there’s more demand for the country’s goods and more inflows of funds, there’s also greater demand for its currency. That can push the currency to appreciate. So the idea that exports exceed imports or investment income exceeds payments, and that the currency may appreciate, is the correct description.

If imports far exceed exports, that describes a current account deficit, which typically puts downward pressure on the currency. The current account balance isn’t always zero, and exchange rates can be influenced by these balances, so saying there’s no effect on exchange rates isn’t accurate.