Should We Care about Canada’s Current Account Balance?
In the first quarter of 2021, for the first time in over a decade, Canada’s current account balance was positive. The latest numbers show a $3.6-billion surplus in the second quarter, following a $1.8-billion surplus in the first. This sounds like good news, right? Words like “positive” and “surplus” put a smile on an economist’s face, don’t they?
Well, when it comes to the current account balance, things are not as straightforward as they appear. To fully grasp the meaning of this news, we need to think about what a country’s current account balance actually is.
A current account balance can be expressed as the difference between the value of exports of goods and services and the value of imports of goods and services. When an economy posts a current account surplus, it means that the value of exports is greater than the value of imports—as has been the case for Canada in the first two quarters of this year. A negative current account balance, or a deficit, means that the value of imports is greater than the value of exports for the period in question.
But no matter the balance, whether positive or negative, economic gains are being made thanks to the benefits of trade. Indeed, the importation of foreign goods promotes consumer welfare as it opens the door to more competition, which increases product variety available to consumers and leads to lower prices. As such, trade especially benefits middle- and lower-income households. And even though high domestic demand for foreign goods may be detrimental to some local producers of those specific products in the short run, the overall benefits of trade far outweigh the losses. As for the exportation of Canadian-made goods, high demand for our products stimulates job creation in the export sector and overall economic growth.
At the end of the day, the current account balance says little about how well our economy is doing. Whether Canada is importing more or less than it’s exporting at any given time, engaging in trade with foreign consumers and producers generates more gains than losses for Canadian citizens.