Why current account and capital & financial account with net surpluses is beneficial for a small...

Why current account and capital & financial account with net surpluses is beneficial for a small and resource lacking economy (e.g Singapore)?

Expert Solution

Answer:

A country's current aaccount is one of the 3 components of its BOP(Balance of Payments), the other being the Capital account and Financial account. The current account consists BOT(Balance of Trade) i.e. net primary income or factor income and also net cash transfers which have taken place in a given time period.

If an economy is running on current surplus then its is absorbing less than it is producing which means that it is saving more. If the economy is an open economy, then this saving is being invested and thus foreign assets are being created.

Singapore has maintained a large current account surplus from early 2000's and its because of structural reasons. Singapore maintains huge pool of foreign reserves to defend itself against speculative attacks and financial shocks for example, Large capital outflows. These foreign assets generate income inflows like profits from overseas shareholdings, which comes under the current account.

On the other hand Singapore enforces compulsory savings in the form of CPF. High level of savings result in lower disposable income causing reduced import spending. Singapores labour is cheap due its structural dependency, which allows firms to defer capital investments.

Rahul Sunny answered 2 years ago

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