Current account imbalances: causes, cures and global significance

Causes of deficits and surpluses

• Economic growth relative to trading partners: fast domestic growth raises imports (cyclical deficit).
• Competitiveness: high unit labour costs, low productivity, poor quality or an overvalued exchange rate cause deficits (structural).
• Savings and investment: the current account balance equals national saving minus investment. Low saving (high consumer borrowing or large budget deficits) means a deficit; high saving means a surplus.
• Commodity prices: exporters gain surpluses in booms.
• Deindustrialisation: loss of manufacturing capacity.
• Investment income: large foreign-owned investments create primary income outflows.

Measures to reduce a deficit

• Expenditure-reducing policies: contractionary fiscal or monetary policy cuts AD and so imports. Cost: slower growth and higher unemployment.
• Expenditure-switching policies: make domestic goods relatively cheaper: devaluation or depreciation, or protectionism. Costs: inflation, retaliation, WTO rules.
• Supply-side policies: raise productivity and non-price competitiveness (education, infrastructure, research). Slow but address the root cause.

To reduce a surplus the reverse applies: expansionary policies, appreciation, encouraging consumption.

Global imbalances

One country's surplus is another's deficit. The IMF (July 2025) reported that global current account balances widened by 0.6 percentage points of world GDP in 2024, with about two-thirds judged excessive. China (+0.24 pp of world GDP), the United States (-0.20 pp) and the euro area (+0.07 pp) contributed most to the rise in excess balances. Its advice: China should rebalance towards consumption, the US should cut its fiscal deficit, and the euro area should invest more in public infrastructure.

Why it matters: deficit countries build up foreign debt and risk sudden stops in financing and currency crises; surplus countries depend on foreign demand; imbalances fuel protectionist pressure and trade tensions; and they can feed asset bubbles (many economists argue this happened before the 2008 financial crisis, when surplus savings flowed into deficit countries).

Evaluation

A deficit is less worrying if it is small relative to GDP, temporary, financed by FDI, or caused by importing capital goods that will raise future output. A surplus can mean weak domestic demand rather than strength.

Worked example

National saving is 18% of GDP and domestic investment is 23% of GDP. What is the current account balance as a % of GDP?

1. Current account balance = saving - investment
2. 18 - 23 = -5

Answer: A deficit of 5% of GDP

Check yourself

1. National saving is 26% of GDP and investment is 21% of GDP. Calculate the current account balance as a percentage of GDP.
   Show answer

   5 %. Saving - investment = 26 - 21 = +5% (a surplus).

2. The IMF reported that global current account balances widened by 0.6 percentage points of world GDP in 2024, about two-thirds of it excessive. How many percentage points were excessive?
   Show answer

   0.4 percentage points. 0.6 x 2/3 = 0.4 percentage points.

3. Which is an expenditure-switching policy to reduce a current account deficit?
   • Raising income tax
   • Raising interest rates
   • Devaluing the currency
   • Cutting government spending
   Show answer

   Devaluing the currency. A devaluation switches spending from imports to domestic goods.

4. A major cost of using contractionary fiscal policy to reduce a current account deficit is
   • higher inflation
   • slower growth and higher unemployment
   • retaliation by trading partners
   • a fall in the exchange rate
   Show answer

   slower growth and higher unemployment. Cutting AD reduces imports by reducing incomes and output.

5. Explain why supply-side policies may be the best long-run way to reduce a structural current account deficit.
   Show answer

   They raise productivity and non-price competitiveness (quality, innovation), so exports become more competitive without cutting growth, tackling the root cause, though they take time.. Structural deficits need structural cures.

6. Which policy did the IMF (2025) recommend for China to reduce global imbalances?
   • Raise tariffs on all imports
   • Rebalance economic activity towards consumption
   • Increase its budget surplus
   • Devalue its currency
   Show answer

   Rebalance economic activity towards consumption. More domestic consumption would reduce China's surplus.

7. Explain one reason why large global current account imbalances are a concern.
   Show answer

   Deficit countries build up large foreign debts and depend on capital inflows, which can stop suddenly, causing currency and financial crises; imbalances can also provoke protectionism.. Persistent imbalances create financial and political risks.

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Sources

• Pearson Edexcel International Advanced Level in Economics specification (issue 2)
• IMF blog: Global current account balances widen, reversing narrowing trend (22 July 2025)

Last updated 8 November 2026. Spotted a mistake? Tell us.