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surplus or deficit on the current 
account
.
A problem arises for a country's balance of payments when the country has a deficit on current account 
year after year, although there can be problems too for a country which enjoys a continual current 
account 
surplus
.
The problems of a 
deficit
 
on the current account are probably the more obvious. When a country is 
continually in deficit, it is importing more goods and services that it is exporting. This leads to two 
possible consequences.
(a) 
It may borrow more and more from abroad, to build up external liabilities which match the deficit 
on the current account, for example encouraging foreign investors to lend more by purchasing the 
government's gilt-edged securities. 
(b) 
It may sell more and more of its assets. This has been happening recently in the US, for example, 
where a large deficit on the US current account has resulted in large purchases of shares in US 
companies by foreign firms. 
Even so, the demand to buy the country's currency in the foreign exchange markets will be weaker than 
the supply of the country's currency for sale. As a consequence, there will be pressure on the exchange 
rate to depreciate in value. 
If a country has a 
surplus 
on the current account year after year, it might invest the surplus abroad or add 
it to official reserves. The balance of payments position would be strong. There is the problem, however, 
that if one country which is a major trading nation (such as Japan) has a continuous surplus on its balance 
of payments current account, other countries must be in continual deficit. These other countries can run 
down their official reserves, perhaps to nothing, and borrow as much as they can to meet the payments 
overseas, but eventually they will run out of money entirely and be unable even to pay their debts. Political 
pressure might therefore build up within the importing countries to impose tariffs or import quotas. 
11.4 How can a government rectify a current account deficit? 
The government of a country with a balance of payments deficit will usually be expected to take 
measures to reduce or eliminate the deficit. A current account deficit may be rectified by one or more of 
the following measures. 
(a) 
A depreciation of the currency (called 
devaluation
when deliberately instigated by the government, 
for example by changing the value of the currency within a controlled exchange rate system) 
(b) 
Direct measures to restrict imports, such as tariffs or import quotas or exchange control 
regulations 
(c) 
Domestic deflation to reduce aggregate demand in the domestic economy 
The first two are