Theoretically,
the balance should be zero, but in the real world this is improbable, so if the
current account has a surplus or a deficit, this tells us something about the
government and state of the economy in
question, both on its own
and in comparison to other
world markets.
A
surplus is indicative of an economy that is a net creditor to the rest of the
world. It shows how much a country is saving as opposed to investing. What this
means is that the country is providing an abundance of resources to other
economies, and is owed money in return. By providing these resources abroad, a
country with a CAB surplus gives other economies the chance to increase their
productivity while running a deficit.
This is referred to as financing a deficit.
A
deficit reflects government and an economy that is a net debtor to the rest of
the world. It is investing more than it is saving and is using resources from
other economies to meet its domestic consumption and investment requirements.
For example, let us say an economy decides that it needs to invest for the
future (to receive investment income in the long run), so instead of saving, it
sends the money abroad into an investment project. This would be marked as a
debit in the financial account of the balance of payments at that period of
time, but when future returns are made, they would be entered as investment
income (a credit) in the current account under the income section.
A
current account deficit is usually accompanied by depletion in foreign-exchange
assets because those reserves would be used for investment abroad. The deficit
could also signify increased foreign investment in the local market, in which
case the local economy is liable to pay the foreign economy investment income
in the future.
It
is important to understand from where a deficit or a surplus is stemming
because sometimes looking at the current account as a whole could be misleading.