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Thursday, May 6, 2010
Foreign Exchange & BOP - HBL (S63)
Referring to HBL activity #2, respond to the question below: Why might some countries have a sustained surplus or deficit on their current account? Refer to specific countries whenever possible.
Current account surplus arises when there is positive net value of exports and imports (X-M), that is when inflows>outflows. Current account deficit on the other hand, arises when (X-M) is negative.
From the graph, countries like Germany have a sustained current account balance since 1998. This is because Germany majors in the trade of goods which are income inelastic. This means that it exports luxury goods, such as branded cars and consumer electronics which operate in oligopolistic industries. Therefore with the absence of close substitutes, the demand for these products by the higher income group will not fall by a significant amount. Therefore Germany maintains its high exports in times of economic downturn, and is able to enjoy a consistent BOP surplus.
As for Japan as seen from the graph, it experienced a BOP deficit up till 2001. From 2001 onwards, Japan enjoyed BOP surplus. This is because before 2001, Japan suffered from the Asian Financial Crisis, which resulted in massive economic slowdown and hence BOP deficit. Since then, Japan underwent structural changes towards a knowledge-driven economy which makes it less susceptible to global fluctuations.
From the table, China is seen to have a sustained current account balance which had been increasing at an increasing pace up till 2008, where it was hit by the 2008 global recession. China’s sustained BOP surplus is due to its undervalued Yuan. China operates a fixed exchange rate system and keeps its exchange rate below the free market value. This means that China’s exports will be cheaper and hence more price competitive relative to other countries, whilst imports from other countries will be more expensive. Hence China will experience a higher export revenue and lower import expenditure in its trade with other countries such as US, as US will import more of China’s goods, and China consumers will switch from US imports to their own local goods. Therefore whilst China is able to enjoy sustained current account surplus, US will suffer from a current account deficit.
From the graph, countries such as UK and US have a sustained current account deficit since 1998. This is due to the countries’ high MPM for imported goods, which would eventually drive up AD and boost economic growth. Also, countries like US depend heavily on imports such as machinery which will increase the productive capacity and enable it to produce more exports in the future. However, due to US’s debt from borrowing to fund the imports, it runs a capital account deficit, which thus leads to a sustained BOP deficit.
The graph was quite hard to read so I went to do some research on http://www.indexmundi.com/germany/current_account_balance.html and contrary to how the rest read the graph, Germany was the one that had current account deficit till 2001 and from 2002 onwards, they had sustained surplus on current account. But I am not sure why Germany had a current account deficit till 2001. Germany is the world's second largest exporter(after China). They export mainly high-value goods such as electronic items, automobiles (Mercedes,Volkswagen, BMW, Audi, Porsche), machinery, metals, and chemical goods. Hence, there is a positive net value of exports and imports (X-M), leading to current account surplus.
Japan has sustained surplus in their current account since 1981. Japan has a large industrial capacity and is home to some of the largest, leading and most technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles and processed foods. The service sector accounts for three quarters of the gross domestic product. While Japan's main imports are fossil fuels, foodstuffs (in particular beef), chemicals, textiles and raw materials for its industries which are do not cost as much as their high-valued exports. Hence, a current account surplus arises as there is positive net value of exports and imports (X-M).
China's current account balance increased rapidly from 2004 till 2008 due to its undervalued Yuan. This relates to cheaper exports, thus making China's goods more price competitive. Foreigners will substitute their domestic goods to China's produce, leading to increased export revenue for China and lower import expenditure as Chinese find that their domestic goods are cheaper than imports. As a result, China is able to have sustained current account surplus.
As for the UK and US, they suffer from sustained current account deficit since 1998. In UK's situation, the increase in demand for goods is not met by their manufacturing sector, so they import more in order to satisfy the high demand. Consumers in UK have a high marginal propensity to import, resulting in the imports being cheap substitutes for the UK produced goods. For US, the deficit could be due to borrowing of money to finance their high military spending etc. and not on investments that will bring in revenue in the long term, hence they have a sustained current account deficit.
Current account records payments arising from trade in goods and services and from income in the form of rent, interest, profits and dividends. It consists two main items which are visible balance and invisible balance. Current account surplus arises when there is positive net value of the visible balance and invisible balance while current account deficit arises when there is a negative net value of the two balances.
From the table, China has a sustained current account surplus. This is mainly caused by undervalued Yuan. Because of the undervalue Yuan, China’s exports will be cheaper or more competitive whilst imports from other countries will be more expensive or uncompetitive. Other countries may therefore consume more services and products from China. Thus, China may experience a higher export revenue and lower import expenditure in its trade with other countries. This will lead to a current account surplus for China but a current account deficit for some other countries, for example, US.
From the graph, countries like US and UK generally have a sustained current account deficit. This may caused by their high imports. The US and UK are both developed countries. Therefore, consumers from these two countries generally have higher income therefore have stronger purchasing power. Moreover, the prices of goods at US and UK may be higher compared to goods from China because of the higher production cost caused buy more expensive labour and renting fees. Therefore, these countries have very high import. However, their export is not so high thus is outweighed by import. They both have current account deficit because they do not earn enough from exports to pay for its imports. However, the current account deficit may not be a problem to US. Although US now has current account deficit and is a net borrower, its borrowing is largely to finance investment rather than consumption. Therefore, the borrowing in turn can generate economic growth and higher income, which is not a problem to the country.
Current account is the record of receipts from the sale of goods and services to other countries (exports), minus payments for goods and services bought from other countries (imports), plus the net amount of interest and transfers received from and paid to other countries. Fluctuations in net exports are the primary source of fluctuations in the current account balance, whereas net interest and transfers are small and do not fluctuate much. Therefore it is safe to say that net exports are the main deciding factor if the current account balance is in surplus or deficit.
Japan is seen to have a sustained current account surplus from 1998-2010 with only a partial dip in 2007 which can be accounted to the recent global financial crisis. This probably came about due to a fall in Japan's exports to the US and the UK as it exports mainly to these two nations. We can observe this from a spike in both the US and UK current account deficit, which implies either an increase in US and UK exports or a fall in their imports. Since both economies were badly hit by the recession, with rising unemployment, cutting of wages and uncertain economic outlook, coupled up with a high marginal propensity to consume, their level of consumption is likely to have dropped, which explains the fall in consumer demand for Japan exports which are mainly made up of luxury goods such as automobiles and consumer electronics.
On the other hand, Japan's imports (which are made up of textiles, foodstuffs from China and military apparel from the US) have an impact on its current account balance as well. Its imports have to be lower than its exports for its current account surplus to be sustained. As such, it is observed that China is enjoying a current account surplus with a recent hike from 2005 onwards with a drop in its surplus of about 40% in 2009 which can again be tied in with the global financial crisis. This suggests that it has suffered a slight fall in exports in 2008, which then resulted in a slight drop in Japan's imports from China, leading to increased net exports and a current account surplus.
US exports however, have been on the rise as can be seen from its improving current account balance. This could be due to the exchange rate of the Yen and the US dollar. The greenback has been depreciating and this in turn leads to an increase in the volume of US exports demanded by Japanese consumers as one Japanese Yen can exchange for more than one US dollar. It could also be that Japan is importing more raw materials from US as investment so as to achieve higher economic growth in the future. As such, production costs for Japanese firms will go down as they use cheaper inputs and they can produce more. This leads to an increase in their exports which can be seen in the rise in Japan’s current account surplus in mid 2008.
Countries can have a sustained surplus or deficit on their current accounts due to changes in export competitiveness, local and global demand, foreign exchange rates, consumers' preferences as well as other factors such as transportation costs or government policies.
From the graph, we see that Germany has had a sustained current account surplus through the years. This is because the German economy is heavily export-oriented, with exports accounting for more than one-third of national output. Its principal exports are: motor vehicles, machinery, chemical products, electrical devices and telecommunications technology. These exports belong to oligopolistic industries. There is a steady demand for them, leading to positive net sales (X-M) to abroad, which contributes to a current account surplus.
Japan has had a current account deficit from 1998 to 2001. This was due to the global economic crisis which led to a plunge in its exports, as overseas consumers were not able to afford pricey Japanese goods such as cars and electronics. However, Japan had a sustained surplus on their current account. This was due to exports being the main engine of Japan's economic growth in the next few years, when the economy picked up. Japan imports raw materials and processes them into high technology products. Japan's major exports are: consumer electronics, automobiles, optical fibres. Its (X-M) was hence positive from 2001 onwards, resulting in it having a current account surplus.
The UK and US both have had a sustained current account deficit. This is largely due to its low savings ratio and large government debt. Demand for foreign goods is also high, resulting in (X-M) being negative, and hence, a sustained current account deficit for these two countries.
China has had a sustained current account surplus, which ballooned after 2001, with China's accession to the World Trade Organisation that year. Exports grew faster, causing accelerating growth in the trade surplus in the 2000s. China also has an extraordinarily high savings rate, resulting in a large saving-investment gap, and hence, massive current account surplus. Furthermore, the undervaluation of the renminbi raised China's exports and depressed its imports, thus inflating China's trade surplus. China's (X-M) was positive, leading to it having a sustained current account surplus.
Current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). It is influenced by factors affecting net export expenditure because balance of trade usually constitutes the most percentage in the CA. Thus, factors such as export competitiveness, exchange rate, incomes of consumers and consumers' preferences affect CA.
Countries such as Germany has a sustained CA surplus from 1998 till 2010 mainly because her balance of trade is largely positive. Germany's export is the biggest in the world and thus her export is likely to be more than her import. Countries like Germany has a very developed industry and thus capital based manufactured goods can be produced efficiently and are also of high quality. This means demand for these goods from abroad is high and thus export revenue from these countries are likely to be very high, exceeding the import expenditure. Thus, with balance of trade surplus (which is usually the most important part of CA), CA can be constantly at surplus.
The reverse applies for CA deficit. For instance, USA has a sustained CA deficit from 1998 to 2010, mainly because her export has lost competitiveness with export from other countries. This may be due to the industries that are inefficient, relatively strong exchange rate as compared to foreign countries. As for US, products from her labour intensive industries cannot compete with cheaper products from the developing countries with much cheaper labour cost. Thus, her export is not as competitive as the export from these developing countries. As a result import expenditure is likely to exceed export revenue and thus negative balance of trade results. With this, CA is likely to be in deficit.
The balance of payment of a country is a statement of all the international transactions of a country with the rest of the world over a period of time, usually a year.
The current current account records payments arising from trade in goods and services and from income in the form of rent, interest, profits and dividends.
Current account surplus arises when there is positive net value of exports and imports (X-M), that is when inflows>outflows. Current account deficit on the other hand, arises when (X-M) is negative.
Germany has a sustained current accont surplus. This is because germany is highly export oriented.
The UK and US both have had a sustained current account deficit. This is due to its low savings ratio. Demand for foreign goods is also high, resulting in (X-M) being negative.
Japan has a current account deficit from 1998 to 2001. This was due to its exports decreasing, as overseas consumers were not able to afford Japanese goods.
Current account is the addition of the balance of trade (BOP) and the net factor incomes from abroad. BOP is the difference between a nation’s exports and imports. The current account measures the country’s foreign trade and a surplus occurs when there is a positive net value of imports and exports; a negative value will lead to a deficit. From the graph, Germany has been enjoying sustained current account surplus because the goods Germany mainly exports are luxury goods, such as BMW and Volkswagen cars. Since the goods that Germany exports are mainly luxury goods, the demand for their goods are inelastic. Production of German exports is capable of very high quality therefore consumers abroad will want to invest their money in these quality goods. The export revenue will therefore be most probably higher than its import revenue, therefore a sustained current account surplus from 1998-2010, as seen in the graph. Japan experienced current account deficit till 2001 , perhaps due to a financial crisis and Japanese exports become too expensive for the other countries to buy, therefore a fall in Japan’s export revenue. Japan then enjoyed sustained current account surplus after 2001, perhaps because of its expertise in electronic products. Japan is well-known for its creative technological inventions, thus giving countries more reason to buy Japanese exports. US and UK experiences current account deficit perhaps due to their non-thrift nature, unlike Asians. This results in low savings rate and large government debt. Also perhaps their exports have lost competitiveness (due to their high costs of production), as compared to other countries such as Thailand and China (eg rice); therefore consumers switch to buying cheaper alternatives and the demand for their exports drop, leading to a negative net value of X-M. China experiences current account surplus because of its fixed exchange rate system. This causes the Chinese Yuan to be undervalued, thus causing their exports to be cheaper than most other countries. Also, labour costs in China are low, cost of production is also lower than most other countries, therefore China’s exports are comparatively more competitive than the rest of the countries, therefore leading to a positive net value of X-M.
Current account is an important component of the balance of payments. It records payments arising from exports and imports of goods, classified under visible balance i.e. physical goods, and the invisible balance i.e. trade that does not involve the physical transfer of goods, which includes the exports and imports of services, assets income paid to and received from abroad and unilateral transfers paid to and received from abroad like aid.
The current account generally records the net inflow of capital into the country. A positive current account would means a balance of trade surplus i.e. a net outflow of exports for example and vice versa for a negative current account.
Looking at China's current account balance, it can be seen that the current account has been increasing and positive since 2001 before taking a sharp dip in 2009. Countries like Germany and Japan has maintain a relatively healthy (positive) current account balance while countries like UK and US are struggling to attain a current account surplus.
China has a comparative advantage in almost all industries but mainly in labour-intensive industries due to her huge population. Hence it is able to produce goods at a cheaper rate and thus is able to pass on the lower cost to the consumers, domestic and abroad, through lower prices in the goods. This increases the attractiveness of their goods and hence there is an increase in demand for their goods abroad. The increase in exports would lead to a healthy, positive trade surplus leading to a positive current account balance.
Japan and Germany are technologically advanced countries and hence are able to produce quality goods at a lower cost than most countries. This enhances the attractiveness and hence demand of their goods which leads to a positive balance of trade. But as inferred from the graph, Germany are experiencing a wide fluctuation in their current account balance.This is due to the fact that they are producing luxury goods such as cars eg.Volkswagen which are highly price elastic. Hence they are extremely susceptile to the world's economy which accounts for the wide fluctuations whereas Japan produces cars that are seen as a necessity by most people like Toyota due to its relatively lower price. Hence they enjoy a relatively healthier and more stable current account balance.
Though UK and US are also technologically advanced countries, their low cost of production are widely offset by their huge demand for imports due to their wide variances in tastes and preferences. Moreover, basic necessities such as clothings and staple food are of high cost of production in US and UK due to the lack of land and labour. The problem of labour may be easily solved by technological advancements but land is the crux of the problem. Hence, US and UK find it more profitable to import this goods, and hence leading them to a negative trade balance. Not only so, countries such as China and Singapore are producing electronic goods at a low cost as well due to globalisation(eg. ease of transporting raw materials and labour) hence eroding US and UK's comparative advantage in producing this kind of goods. This reduces the demand and thus exports of the countries, which worsens the current account balance.
Also, countries like China can maintain a positive current account balance due to its policy of keeping its currency undervalued so that it allows its exports to be more competitive as compared to the other countries. US's currency is very strong and hence, its exports are much more expensive than other countries and imports and cheaper to them than to any countries. Their exchange thus encourages the Americans to consume more imported goods which worsens their current account balance.
Current account is a sub-component of BOP and it records payments arising from trade in goods and services and from income on the form of rent, interest, profits and dividends.
As seen from the table, China’s current account balance raised significantly fro US$29.3 billion in 1998 to US$426.1 billion in 2008. This could very well indicate that there was an increase in demand for China’s goods and services resulting in more exports by China. As China has a comparative advantage in many industries, its goods will be relatively cheaper than other countries hence making it competitive in the world market. Due to her huge population, China will also attract many investors in the labor-intensive industry since there is a huge supply of workers which also indicates lower wages needed to hire them. Therefore by attracting more of such investors, it will help to boost China’s economy and hence allows it to enjoy substantial sustained current account surplus.
Germany experienced a current account deficit from 1998 until 2001 before it had a current account surplus which generally continued all the way until 2010. It suffered from current account deficit because of adverse international economic conditions. However, since it is now the world’s third largest economy and is one of the biggest exporters of high-end automobiles such as Mercedes, Volkswagen, and Porsche, it is not surprising to see it enjoying a current account surplus after 2001. With a high demand for such luxurious cars, Germany enjoys a positive net value of imports and exports (X-M).
Japan enjoys a sustained increasing current account surplus from 1998 to 2010, except for 2008 when is dropped by a little. As Japan is home to one of the world’s most advanced technology and also a major exporter of electronic products, it is able to have a positive net value of imports and exports (X-M). Japan is also home to many automobile brands such as Toyota, Honda and Mitsubishi. These brands are often demanded by consumers because of the rather reasonable prices and being the exporter of these cars, Japan is hence able to enjoy a sustained current account surplus.
UK and US have been experiencing a sustained current account deficit from 1998 to 2010. This could be due to their low savings ratio and large government debt, especially for US after the Wall Street crash in 2009. The governments in these two countries spend more money on consumption than investment and these results in interest payments. Consumption may eventually have to be reduced if the deficit results in falling national income. UK and US do not have comparative advantage in labor-intensive industries as well because the people in these countries command a higher pay than in countries such as China. Hence the demand from other countries for labor-intensive goods and services will be low whereas the local demand for such products from other countries may be high. This will result in a negative net value of imports and exports (X-M). Thus UK and US will experience a current account deficit as long as they continue to spend on consumption rather than investment, which will help to generate income in future.
Current Account (CA): • Records payments arising from trading and income from property income, which includes rent, interest, profits and dividends.
• It is influenced by the import and export of physical goods, i.e. net exports by the country (Visible balance).
• Also influenced by import and export levels of services and property income (invisible balance).
US: • Persistent CA deficit between the years 1998 to 2010. • US’ domestic consumer spending is huge, accounting for 70% of its GDP. • Since 1983, US became net borrower, issuing securities and bonds to foreign firms and governments to borrow funds to fund its expenditures. • Imports consisted of consumer durables, such as automobiles, furniture, clothing, agricultural produce, capital goods etc. • Its deficit is caused mainly by huge borrowing and a large consumer market, hence import levels are massive, as export revenue fails to keep up • US import expenditure (M) far outweighed its export revenue (X). • US military spending on military equipment is also massive - $600 billion in 2008, more than the total military expenditure of the next top spending countries combined. • Reluctance of US to sell its high-end weapons and military technology to large nations like China and Russia curbs its X from such industries (e.g. Lockheed Martin, Boeing, General Dynamics etc.) • All this leads to massive deficit in US current account in its visible balance.
Japan: • It has persistent CA surplus of around 2.5 to 5% of its GDP throughout the years between 1998 and 2010. • Economy specializes in high-end, capital-intensive industries as well as a huge service sector (75% of national output) • Japan is home to many large industrial and servicing corporations like Mitsubishi, Sumitomo, Toyota, Mitsui etc. and some of the largest banks worldwide. • Japanese multi-national companies (MNCs) such as Sony, Toyota, Panasonic etc. enjoy huge market shares in their respective industries, and foreign investment in Japanese firms is often massive, with the Tokyo Stock Exchange rated second largest worldwide by market capitalization. • Income from abroad, such as dividends and profits of these MNCs remitted home, contribute to huge inflows into Japan’s current account, contribute to overall surplus in CA. • Japanese exports include high-end technological products and consumer durables e.g. automobiles, semiconductor manufacturing, electronics, industrial equipment etc. • Imports are mostly raw materials to fuel its capital-intensive industries such as ferrous materials, timber, etc. • Largely self-sufficient in staple of rice. • Thus exports are mostly value-added goods, while imports consisting of mainly raw materials. • Export revenue likely to exceed import expenditure • Net inflow of currency into Japan’s visible balance, contribute to surplus in its CA.
UK: • Persistent CA deficit between 1998 and 2010. • It’s service sector contributes to most of its GDP (73%) • Decline in significance of UK’s manufacturing sector. • UK has trade deficit in manufactured goods • export revenue is less than its import expenditure (XM) • Net inflow into its CA visible balance • Able to do this due to China’s reputation of having a low-cost and efficient labor force and production capabilities, thus exports will be relatively cheaper to foreigners. Demand for China’s exports is thus huge and substantial. • However China’s undervalued Yuan makes China’s imports more expensive to the Chinese than at free-market ER, thus Chinese import volume is curbed and reduced. M is thus stunted. • This allows China to earn more X and reduce M, contributing to its CA surplus.
Germany: • CA deficit from 1998 to 2001, CA surplus from 2002 onwards to 2010. • CA surplus levels rose during the time between 2002 and 2007, after which its CA surplus fell slightly between 2007 and 2008, and somewhat stabilizing thereafter. • Germany was the world's largest exporter from 2003 to 2008. • Second largest global exporter from 2009 onwards, after China. • Service sector provides 70% of Germany’s GDP • Exported products consist mainly of engineering equipment and products, consumer durables like cars, machinery and chemical products. • Germany is home to some of the most profitable firms worldwide, e.g. Allianz (banking giant) and Daimler and Deutsche Bank. • Profits and dividends of such giant German MNCs (e.g. banking) remitted back home from overseas ventures are likely to contribute to significant amounts inflow of currency into Germany’s CA • Exports of Germany’s high-end and capital-intensive industries, such as luxury cars (BMW, Porsche, Audi etc.) as well as chemical products, also provide massive inflow into its CA, given its high export output. • Germany imports energy resources like oil, natural gas (to meet 2/3 of its energy needs) • But given that Germany is overall a net exporter, outflows are much less than its CA inflow, leading to Germany accumulating large CA surplus as seen in the graph throughout the years.
China: • Has persistent CA surplus from 1998 to 2010 • China owns several of the world’s most valuable / profitable companies and MNCs, including PetroChina, Industrial and Commercial Bank of China (ICBC), China Mobile etc. • Profits and dividends earned in foreign markets by these Chinese MNCs are remitted back to mainland and thus contribute to inflow of currency into invisible balance of China’s CA. • Much of China’s GDP comes from its industrial sector, and China is the leading exporter globally. • Also imports substantially (globally ranked 2nd) • X stands at US$1.2 trillion while M was US$1.01 trillion as of 2009, thus China enjoys trade surplus (X>M) • Net inflow into its CA visible balance • Able to do this due to China’s reputation of having a low-cost and efficient labor force and production capabilities, thus exports will be relatively cheaper to foreigners. Demand for China’s exports is thus huge and substantial. • However China’s undervalued Yuan makes China’s imports more expensive to the Chinese than at free-market ER, thus Chinese import volume is curbed and reduced. M is thus stunted. • This allows China to earn more X and reduce M, contributing to its CA surplus.
Current account records payments arising from the trade in goods and services as well as in the form of income in the form of rent, interest, profits and dividends. It is divided into 2 main items namely Visible balance as well as Invisible balance. Visible balance would be the net value of the exports and imports of goods (X-M) while invisible balance would be like net property income and net unilateral transfers. Current account surplus arises when there is positive net value of the visible balance and invisible balance while current account deficit arises when there is a negative net value of the two balances. Countries which have a current account deficit like the United Kingdoms (U.K) as well as the United States as seen from the graph, where their current account balance as a percentage of their GDP was always negative since 1998-2010. This would be due to the fact that their net imports are always more than their exports, thus causing their current account to be negative. However, this would be due to the fact that countries like the UK and the US have a large domestic market, therefore causing them to be importing more goods to sell in their country rather than produce more to sell to other countries. Therefore, their current account is negative mainly due to the fact that they depend a lot on imports to sustain their huge domestic market. Furthermore, the US and UK’s economy is primarily built on their domestic market, therefore, having a current account deficit would be of no hindrance to their country’s growth whatsoever. Countries like Germany who have been having a sustained current account balance would be primarily due to the fact that it is producing more than it is consuming, therefore having it’s citizens having a lower living standard than it should. Germany being a key exporter in sectors like engineering, especially in automobiles, machinery, metals and chemical goods. As seen from reports in 2009, Germany exported US$1.170 TRILLION in exports whereas it only imported US$931.3 BILLION worth of imports. Therefore, it has a sustained current account balance due to the fact that it’s economy is largely sustained by exports rather than imports. Also countries like China who have a sustained current account surplus would be due to the fact that it is the growing economy of Asia, it is responsible for a large amount of exports to the world. Despite the fact that it’s exports is US$1.20TRILLION and its’ imports being a close US$1.01TRILLION. It would have a sustained current account surplus mainly due to the fact of its invisible balance like private investments and unilateral transfers. As we all know, many investors are looking towards investing in China due to the great business confidence that investors have in China because of it’s growing and huge economy with a lot of potential to grow, therefore with this positive business outlook, a lot of investors are investing in China’s markets like property, shares etc. Also, China has a lot of citizens that head to other countries to work as foreign workers, therefore, a lot of transfers of money across national boundaries sent by their citizens as gifts or remittances get back to the economy of China. Therefore contributing to its’ sustained current account surplus.
Current account surplus arises when there is positive net value of exports and imports (X-M), that is when inflows>outflows. Current account deficit on the other hand, arises when (X-M) is negative.
ReplyDeleteFrom the graph, countries like Germany have a sustained current account balance since 1998. This is because Germany majors in the trade of goods which are income inelastic. This means that it exports luxury goods, such as branded cars and consumer electronics which operate in oligopolistic industries. Therefore with the absence of close substitutes, the demand for these products by the higher income group will not fall by a significant amount. Therefore Germany maintains its high exports in times of economic downturn, and is able to enjoy a consistent BOP surplus.
As for Japan as seen from the graph, it experienced a BOP deficit up till 2001. From 2001 onwards, Japan enjoyed BOP surplus. This is because before 2001, Japan suffered from the Asian Financial Crisis, which resulted in massive economic slowdown and hence BOP deficit. Since then, Japan underwent structural changes towards a knowledge-driven economy which makes it less susceptible to global fluctuations.
From the table, China is seen to have a sustained current account balance which had been increasing at an increasing pace up till 2008, where it was hit by the 2008 global recession. China’s sustained BOP surplus is due to its undervalued Yuan. China operates a fixed exchange rate system and keeps its exchange rate below the free market value. This means that China’s exports will be cheaper and hence more price competitive relative to other countries, whilst imports from other countries will be more expensive. Hence China will experience a higher export revenue and lower import expenditure in its trade with other countries such as US, as US will import more of China’s goods, and China consumers will switch from US imports to their own local goods. Therefore whilst China is able to enjoy sustained current account surplus, US will suffer from a current account deficit.
From the graph, countries such as UK and US have a sustained current account deficit since 1998. This is due to the countries’ high MPM for imported goods, which would eventually drive up AD and boost economic growth. Also, countries like US depend heavily on imports such as machinery which will increase the productive capacity and enable it to produce more exports in the future. However, due to US’s debt from borrowing to fund the imports, it runs a capital account deficit, which thus leads to a sustained BOP deficit.
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ReplyDeleteThe graph was quite hard to read so I went to do some research on http://www.indexmundi.com/germany/current_account_balance.html
ReplyDeleteand contrary to how the rest read the graph, Germany was the one that had current account deficit till 2001 and from 2002 onwards, they had sustained surplus on current account.
But I am not sure why Germany had a current account deficit till 2001.
Germany is the world's second largest exporter(after China). They export mainly high-value goods such as electronic items, automobiles (Mercedes,Volkswagen, BMW, Audi, Porsche), machinery, metals, and chemical goods. Hence, there is a positive net value of exports and imports (X-M), leading to current account surplus.
Japan has sustained surplus in their current account since 1981. Japan has a large industrial capacity and is home to some of the largest, leading and most technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles and processed foods. The service sector accounts for three quarters of the gross domestic product. While Japan's main imports are fossil fuels, foodstuffs (in particular beef), chemicals, textiles and raw materials for its industries which are do not cost as much as their high-valued exports. Hence, a current account surplus arises as there is positive net value of exports and imports (X-M).
China's current account balance increased rapidly from 2004 till 2008 due to its undervalued Yuan. This relates to cheaper exports, thus making China's goods more price competitive. Foreigners will substitute their domestic goods to China's produce, leading to increased export revenue for China and lower import expenditure as Chinese find that their domestic goods are cheaper than imports. As a result, China is able to have sustained current account surplus.
As for the UK and US, they suffer from sustained current account deficit since 1998. In UK's situation, the increase in demand for goods is not met by their manufacturing sector, so they import more in order to satisfy the high demand. Consumers in UK have a high marginal propensity to import, resulting in the imports being cheap substitutes for the UK produced goods. For US, the deficit could be due to borrowing of money to finance their high military spending etc. and not on investments that will bring in revenue in the long term, hence they have a sustained current account deficit.
Current account records payments arising from trade in goods and services and from income in the form of rent, interest, profits and dividends. It consists two main items which are visible balance and invisible balance. Current account surplus arises when there is positive net value of the visible balance and invisible balance while current account deficit arises when there is a negative net value of the two balances.
ReplyDeleteFrom the table, China has a sustained current account surplus. This is mainly caused by undervalued Yuan. Because of the undervalue Yuan, China’s exports will be cheaper or more competitive whilst imports from other countries will be more expensive or uncompetitive. Other countries may therefore consume more services and products from China. Thus, China may experience a higher export revenue and lower import expenditure in its trade with other countries. This will lead to a current account surplus for China but a current account deficit for some other countries, for example, US.
From the graph, countries like US and UK generally have a sustained current account deficit. This may caused by their high imports. The US and UK are both developed countries. Therefore, consumers from these two countries generally have higher income therefore have stronger purchasing power. Moreover, the prices of goods at US and UK may be higher compared to goods from China because of the higher production cost caused buy more expensive labour and renting fees. Therefore, these countries have very high import. However, their export is not so high thus is outweighed by import. They both have current account deficit because they do not earn enough from exports to pay for its imports. However, the current account deficit may not be a problem to US. Although US now has current account deficit and is a net borrower, its borrowing is largely to finance investment rather than consumption. Therefore, the borrowing in turn can generate economic growth and higher income, which is not a problem to the country.
Current account is the record of receipts from the sale of goods and services to other countries (exports), minus payments for goods and services bought from other countries (imports), plus the net amount of interest and transfers received from and paid to other countries. Fluctuations in net exports are the primary source of fluctuations in the current account balance, whereas net interest and transfers are small and do not fluctuate much. Therefore it is safe to say that net exports are the main deciding factor if the current account balance is in surplus or deficit.
ReplyDeleteJapan is seen to have a sustained current account surplus from 1998-2010 with only a partial dip in 2007 which can be accounted to the recent global financial crisis. This probably came about due to a fall in Japan's exports to the US and the UK as it exports mainly to these two nations. We can observe this from a spike in both the US and UK current account deficit, which implies either an increase in US and UK exports or a fall in their imports. Since both economies were badly hit by the recession, with rising unemployment, cutting of wages and uncertain economic outlook, coupled up with a high marginal propensity to consume, their level of consumption is likely to have dropped, which explains the fall in consumer demand for Japan exports which are mainly made up of luxury goods such as automobiles and consumer electronics.
On the other hand, Japan's imports (which are made up of textiles, foodstuffs from China and military apparel from the US) have an impact on its current account balance as well. Its imports have to be lower than its exports for its current account surplus to be sustained. As such, it is observed that China is enjoying a current account surplus with a recent hike from 2005 onwards with a drop in its surplus of about 40% in 2009 which can again be tied in with the global financial crisis. This suggests that it has suffered a slight fall in exports in 2008, which then resulted in a slight drop in Japan's imports from China, leading to increased net exports and a current account surplus.
US exports however, have been on the rise as can be seen from its improving current account balance. This could be due to the exchange rate of the Yen and the US dollar. The greenback has been depreciating and this in turn leads to an increase in the volume of US exports demanded by Japanese consumers as one Japanese Yen can exchange for more than one US dollar. It could also be that Japan is importing more raw materials from US as investment so as to achieve higher economic growth in the future. As such, production costs for Japanese firms will go down as they use cheaper inputs and they can produce more. This leads to an increase in their exports which can be seen in the rise in Japan’s current account surplus in mid 2008.
Countries can have a sustained surplus or deficit on their current accounts due to changes in export competitiveness, local and global demand, foreign exchange rates, consumers' preferences as well as other factors such as transportation costs or government policies.
ReplyDeleteFrom the graph, we see that Germany has had a sustained current account surplus through the years. This is because the German economy is heavily export-oriented, with exports accounting for more than one-third of national output. Its principal exports are: motor vehicles, machinery, chemical products, electrical devices and telecommunications technology. These exports belong to oligopolistic industries. There is a steady demand for them, leading to positive net sales (X-M) to abroad, which contributes to a current account surplus.
Japan has had a current account deficit from 1998 to 2001. This was due to the global economic crisis which led to a plunge in its exports, as overseas consumers were not able to afford pricey Japanese goods such as cars and electronics. However, Japan had a sustained surplus on their current account. This was due to exports being the main engine of Japan's economic growth in the next few years, when the economy picked up. Japan imports raw materials and processes them into high technology products. Japan's major exports are: consumer electronics, automobiles, optical fibres. Its (X-M) was hence positive from 2001 onwards, resulting in it having a current account surplus.
The UK and US both have had a sustained current account deficit. This is largely due to its low savings ratio and large government debt. Demand for foreign goods is also high, resulting in (X-M) being negative, and hence, a sustained current account deficit for these two countries.
China has had a sustained current account surplus, which ballooned after 2001, with China's accession to the World Trade Organisation that year. Exports grew faster, causing accelerating growth in the trade surplus in the 2000s. China also has an extraordinarily high savings rate, resulting in a large saving-investment gap, and hence, massive current account surplus. Furthermore, the undervaluation of the renminbi raised China's exports and depressed its imports, thus inflating China's trade surplus. China's (X-M) was positive, leading to it having a sustained current account surplus.
Current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). It is influenced by factors affecting net export expenditure because balance of trade usually constitutes the most percentage in the CA. Thus, factors such as export competitiveness, exchange rate, incomes of consumers and consumers' preferences affect CA.
ReplyDeleteCountries such as Germany has a sustained CA surplus from 1998 till 2010 mainly because her balance of trade is largely positive. Germany's export is the biggest in the world and thus her export is likely to be more than her import. Countries like Germany has a very developed industry and thus capital based manufactured goods can be produced efficiently and are also of high quality. This means demand for these goods from abroad is high and thus export revenue from these countries are likely to be very high, exceeding the import expenditure. Thus, with balance of trade surplus (which is usually the most important part of CA), CA can be constantly at surplus.
The reverse applies for CA deficit. For instance, USA has a sustained CA deficit from 1998 to 2010, mainly because her export has lost competitiveness with export from other countries. This may be due to the industries that are inefficient, relatively strong exchange rate as compared to foreign countries. As for US, products from her labour intensive industries cannot compete with cheaper products from the developing countries with much cheaper labour cost. Thus, her export is not as competitive as the export from these developing countries. As a result import expenditure is likely to exceed export revenue and thus negative balance of trade results. With this, CA is likely to be in deficit.
The balance of payment of a country is a statement of all the international transactions of a country with the rest of the world over a period of time, usually a year.
ReplyDeleteThe current current account records payments arising from trade in goods and services and from income in the form of rent, interest, profits and dividends.
Current account surplus arises when there is positive net value of exports and imports (X-M), that is when inflows>outflows. Current account deficit on the other hand, arises when (X-M) is negative.
Germany has a sustained current accont surplus. This is because germany is highly export oriented.
The UK and US both have had a sustained current account deficit. This is due to its low savings ratio. Demand for foreign goods is also high, resulting in (X-M) being negative.
Japan has a current account deficit from 1998 to 2001. This was due to its exports decreasing, as overseas consumers were not able to afford Japanese goods.
Current account is the addition of the balance of trade (BOP) and the net factor incomes from abroad. BOP is the difference between a nation’s exports and imports.
ReplyDeleteThe current account measures the country’s foreign trade and a surplus occurs when there is a positive net value of imports and exports; a negative value will lead to a deficit.
From the graph, Germany has been enjoying sustained current account surplus because the goods Germany mainly exports are luxury goods, such as BMW and Volkswagen cars. Since the goods that Germany exports are mainly luxury goods, the demand for their goods are inelastic. Production of German exports is capable of very high quality therefore consumers abroad will want to invest their money in these quality goods. The export revenue will therefore be most probably higher than its import revenue, therefore a sustained current account surplus from 1998-2010, as seen in the graph.
Japan experienced current account deficit till 2001 , perhaps due to a financial crisis and Japanese exports become too expensive for the other countries to buy, therefore a fall in Japan’s export revenue. Japan then enjoyed sustained current account surplus after 2001, perhaps because of its expertise in electronic products. Japan is well-known for its creative technological inventions, thus giving countries more reason to buy Japanese exports.
US and UK experiences current account deficit perhaps due to their non-thrift nature, unlike Asians. This results in low savings rate and large government debt. Also perhaps their exports have lost competitiveness (due to their high costs of production), as compared to other countries such as Thailand and China (eg rice); therefore consumers switch to buying cheaper alternatives and the demand for their exports drop, leading to a negative net value of X-M.
China experiences current account surplus because of its fixed exchange rate system. This causes the Chinese Yuan to be undervalued, thus causing their exports to be cheaper than most other countries. Also, labour costs in China are low, cost of production is also lower than most other countries, therefore China’s exports are comparatively more competitive than the rest of the countries, therefore leading to a positive net value of X-M.
Current account is an important component of the balance of payments. It records payments arising from exports and imports of goods, classified under visible balance i.e. physical goods, and the invisible balance i.e. trade that does not involve the physical transfer of goods, which includes the exports and imports of services, assets income paid to and received from abroad and unilateral transfers paid to and received from abroad like aid.
ReplyDeleteThe current account generally records the net inflow of capital into the country. A positive current account would means a balance of trade surplus i.e. a net outflow of exports for example and vice versa for a negative current account.
Looking at China's current account balance, it can be seen that the current account has been increasing and positive since 2001 before taking a sharp dip in 2009. Countries like Germany and Japan has maintain a relatively healthy (positive) current account balance while countries like UK and US are struggling to attain a current account surplus.
China has a comparative advantage in almost all industries but mainly in labour-intensive industries due to her huge population. Hence it is able to produce goods at a cheaper rate and thus is able to pass on the lower cost to the consumers, domestic and abroad, through lower prices in the goods. This increases the attractiveness of their goods and hence there is an increase in demand for their goods abroad. The increase in exports would lead to a healthy, positive trade surplus leading to a positive current account balance.
Japan and Germany are technologically advanced countries and hence are able to produce quality
goods at a lower cost than most countries. This enhances the attractiveness and hence demand of their goods which leads to a positive balance of trade. But as inferred from the graph, Germany are experiencing a wide fluctuation in their current account balance.This is due to the fact that they are producing luxury goods such as cars eg.Volkswagen which are highly price elastic. Hence they are extremely susceptile to the world's economy which accounts for the wide fluctuations whereas Japan produces cars that are seen as a necessity by most people like Toyota due to its relatively lower price. Hence they enjoy a relatively healthier and more stable current account balance.
Though UK and US are also technologically advanced countries, their low cost of production are widely offset by their huge demand for imports due to their wide variances in tastes and preferences. Moreover, basic necessities such as clothings and staple food are of high cost of production in US and UK due to the lack of land and labour. The problem of labour may be easily solved by technological advancements but land is the crux of the problem. Hence, US and UK find it more profitable to import this goods, and hence leading them to a negative trade balance. Not only so, countries such as China and Singapore are producing electronic goods at a low cost as well due to globalisation(eg. ease of transporting raw materials and labour) hence eroding US and UK's comparative advantage in producing this kind of goods. This reduces the demand and thus exports of the countries, which worsens the current account balance.
Also, countries like China can maintain a positive current account balance due to its policy of keeping its currency undervalued so that it allows its exports to be more competitive as compared to the other countries. US's currency is very strong and hence, its exports are much more expensive than other countries and imports and cheaper to them than to any countries. Their exchange thus encourages the Americans to consume more imported goods which worsens their current account balance.
Current account is a sub-component of BOP and it records payments arising from trade in goods and services and from income on the form of rent, interest, profits and dividends.
ReplyDeleteAs seen from the table, China’s current account balance raised significantly fro US$29.3 billion in 1998 to US$426.1 billion in 2008. This could very well indicate that there was an increase in demand for China’s goods and services resulting in more exports by China. As China has a comparative advantage in many industries, its goods will be relatively cheaper than other countries hence making it competitive in the world market. Due to her huge population, China will also attract many investors in the labor-intensive industry since there is a huge supply of workers which also indicates lower wages needed to hire them. Therefore by attracting more of such investors, it will help to boost China’s economy and hence allows it to enjoy substantial sustained current account surplus.
Germany experienced a current account deficit from 1998 until 2001 before it had a current account surplus which generally continued all the way until 2010. It suffered from current account deficit because of adverse international economic conditions. However, since it is now the world’s third largest economy and is one of the biggest exporters of high-end automobiles such as Mercedes, Volkswagen, and Porsche, it is not surprising to see it enjoying a current account surplus after 2001. With a high demand for such luxurious cars, Germany enjoys a positive net value of imports and exports (X-M).
Japan enjoys a sustained increasing current account surplus from 1998 to 2010, except for 2008 when is dropped by a little. As Japan is home to one of the world’s most advanced technology and also a major exporter of electronic products, it is able to have a positive net value of imports and exports (X-M). Japan is also home to many automobile brands such as Toyota, Honda and Mitsubishi. These brands are often demanded by consumers because of the rather reasonable prices and being the exporter of these cars, Japan is hence able to enjoy a sustained current account surplus.
UK and US have been experiencing a sustained current account deficit from 1998 to 2010. This could be due to their low savings ratio and large government debt, especially for US after the Wall Street crash in 2009. The governments in these two countries spend more money on consumption than investment and these results in interest payments. Consumption may eventually have to be reduced if the deficit results in falling national income. UK and US do not have comparative advantage in labor-intensive industries as well because the people in these countries command a higher pay than in countries such as China. Hence the demand from other countries for labor-intensive goods and services will be low whereas the local demand for such products from other countries may be high. This will result in a negative net value of imports and exports (X-M). Thus UK and US will experience a current account deficit as long as they continue to spend on consumption rather than investment, which will help to generate income in future.
Current Account (CA):
ReplyDelete• Records payments arising from trading and income from property income, which includes rent, interest, profits and dividends.
• It is influenced by the import and export of physical goods, i.e. net exports by the country (Visible balance).
• Also influenced by import and export levels of services and property income (invisible balance).
US:
• Persistent CA deficit between the years 1998 to 2010.
• US’ domestic consumer spending is huge, accounting for 70% of its GDP.
• Since 1983, US became net borrower, issuing securities and bonds to foreign firms and governments to borrow funds to fund its expenditures.
• Imports consisted of consumer durables, such as automobiles, furniture, clothing, agricultural produce, capital goods etc.
• Its deficit is caused mainly by huge borrowing and a large consumer market, hence import levels are massive, as export revenue fails to keep up
• US import expenditure (M) far outweighed its export revenue (X).
• US military spending on military equipment is also massive - $600 billion in 2008, more than the total military expenditure of the next top spending countries combined.
• Reluctance of US to sell its high-end weapons and military technology to large nations like China and Russia curbs its X from such industries (e.g. Lockheed Martin, Boeing, General Dynamics etc.)
• All this leads to massive deficit in US current account in its visible balance.
Japan:
• It has persistent CA surplus of around 2.5 to 5% of its GDP throughout the years between 1998 and 2010.
• Economy specializes in high-end, capital-intensive industries as well as a huge service sector (75% of national output)
• Japan is home to many large industrial and servicing corporations like Mitsubishi, Sumitomo, Toyota, Mitsui etc. and some of the largest banks worldwide.
• Japanese multi-national companies (MNCs) such as Sony, Toyota, Panasonic etc. enjoy huge market shares in their respective industries, and foreign investment in Japanese firms is often massive, with the Tokyo Stock Exchange rated second largest worldwide by market capitalization.
• Income from abroad, such as dividends and profits of these MNCs remitted home, contribute to huge inflows into Japan’s current account, contribute to overall surplus in CA.
• Japanese exports include high-end technological products and consumer durables e.g. automobiles, semiconductor manufacturing, electronics, industrial equipment etc.
• Imports are mostly raw materials to fuel its capital-intensive industries such as ferrous materials, timber, etc.
• Largely self-sufficient in staple of rice.
• Thus exports are mostly value-added goods, while imports consisting of mainly raw materials.
• Export revenue likely to exceed import expenditure
• Net inflow of currency into Japan’s visible balance, contribute to surplus in its CA.
UK:
• Persistent CA deficit between 1998 and 2010.
• It’s service sector contributes to most of its GDP (73%)
• Decline in significance of UK’s manufacturing sector.
• UK has trade deficit in manufactured goods
• export revenue is less than its import expenditure (XM)
• Net inflow into its CA visible balance
• Able to do this due to China’s reputation of having a low-cost and efficient labor force and production capabilities, thus exports will be relatively cheaper to foreigners. Demand for China’s exports is thus huge and substantial.
• However China’s undervalued Yuan makes China’s imports more expensive to the Chinese than at free-market ER, thus Chinese import volume is curbed and reduced. M is thus stunted.
• This allows China to earn more X and reduce M, contributing to its CA surplus.
(most info found from wiki :) )
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ReplyDeleteGermany:
• CA deficit from 1998 to 2001, CA surplus from 2002 onwards to 2010.
• CA surplus levels rose during the time between 2002 and 2007, after which its CA surplus fell slightly between 2007 and 2008, and somewhat stabilizing thereafter.
• Germany was the world's largest exporter from 2003 to 2008.
• Second largest global exporter from 2009 onwards, after China.
• Service sector provides 70% of Germany’s GDP
• Exported products consist mainly of engineering equipment and products, consumer durables like cars, machinery and chemical products.
• Germany is home to some of the most profitable firms worldwide, e.g. Allianz (banking giant) and Daimler and Deutsche Bank.
• Profits and dividends of such giant German MNCs (e.g. banking) remitted back home from overseas ventures are likely to contribute to significant amounts inflow of currency into Germany’s CA
• Exports of Germany’s high-end and capital-intensive industries, such as luxury cars (BMW, Porsche, Audi etc.) as well as chemical products, also provide massive inflow into its CA, given its high export output.
• Germany imports energy resources like oil, natural gas (to meet 2/3 of its energy needs)
• But given that Germany is overall a net exporter, outflows are much less than its CA inflow, leading to Germany accumulating large CA surplus as seen in the graph throughout the years.
China:
• Has persistent CA surplus from 1998 to 2010
• China owns several of the world’s most valuable / profitable companies and MNCs, including PetroChina, Industrial and Commercial Bank of China (ICBC), China Mobile etc.
• Profits and dividends earned in foreign markets by these Chinese MNCs are remitted back to mainland and thus contribute to inflow of currency into invisible balance of China’s CA.
• Much of China’s GDP comes from its industrial sector, and China is the leading exporter globally.
• Also imports substantially (globally ranked 2nd)
• X stands at US$1.2 trillion while M was US$1.01 trillion as of 2009, thus China enjoys trade surplus (X>M)
• Net inflow into its CA visible balance
• Able to do this due to China’s reputation of having a low-cost and efficient labor force and production capabilities, thus exports will be relatively cheaper to foreigners. Demand for China’s exports is thus huge and substantial.
• However China’s undervalued Yuan makes China’s imports more expensive to the Chinese than at free-market ER, thus Chinese import volume is curbed and reduced. M is thus stunted.
• This allows China to earn more X and reduce M, contributing to its CA surplus.
Current account records payments arising from the trade in goods and services as well as in the form of income in the form of rent, interest, profits and dividends. It is divided into 2 main items namely Visible balance as well as Invisible balance. Visible balance would be the net value of the exports and imports of goods (X-M) while invisible balance would be like net property income and net unilateral transfers. Current account surplus arises when there is positive net value of the visible balance and invisible balance while current account deficit arises when there is a negative net value of the two balances.
ReplyDeleteCountries which have a current account deficit like the United Kingdoms (U.K) as well as the United States as seen from the graph, where their current account balance as a percentage of their GDP was always negative since 1998-2010. This would be due to the fact that their net imports are always more than their exports, thus causing their current account to be negative. However, this would be due to the fact that countries like the UK and the US have a large domestic market, therefore causing them to be importing more goods to sell in their country rather than produce more to sell to other countries. Therefore, their current account is negative mainly due to the fact that they depend a lot on imports to sustain their huge domestic market. Furthermore, the US and UK’s economy is primarily built on their domestic market, therefore, having a current account deficit would be of no hindrance to their country’s growth whatsoever.
Countries like Germany who have been having a sustained current account balance would be primarily due to the fact that it is producing more than it is consuming, therefore having it’s citizens having a lower living standard than it should. Germany being a key exporter in sectors like engineering, especially in automobiles, machinery, metals and chemical goods. As seen from reports in 2009, Germany exported US$1.170 TRILLION in exports whereas it only imported US$931.3 BILLION worth of imports. Therefore, it has a sustained current account balance due to the fact that it’s economy is largely sustained by exports rather than imports.
Also countries like China who have a sustained current account surplus would be due to the fact that it is the growing economy of Asia, it is responsible for a large amount of exports to the world. Despite the fact that it’s exports is US$1.20TRILLION and its’ imports being a close US$1.01TRILLION. It would have a sustained current account surplus mainly due to the fact of its invisible balance like private investments and unilateral transfers. As we all know, many investors are looking towards investing in China due to the great business confidence that investors have in China because of it’s growing and huge economy with a lot of potential to grow, therefore with this positive business outlook, a lot of investors are investing in China’s markets like property, shares etc. Also, China has a lot of citizens that head to other countries to work as foreign workers, therefore, a lot of transfers of money across national boundaries sent by their citizens as gifts or remittances get back to the economy of China. Therefore contributing to its’ sustained current account surplus.