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Explain why an increase in national saving (S) relative to investment (I) may lead to a...

Explain why an increase in national saving (S) relative to investment (I) may lead to a current account surplus under flexible exchange rates.


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--> Under flexible exchange rate regime, the value of currency is determined by forces of demand and supply. Current account includes trade in goods and services, investment income such as dividends, interest, remittance and transfer payments. A country can have current account surplus when country's imports are less than exports. If a country has less savings related to investment, then the people are spending more leading to increased imports causing current account deficit. If a country has more savings than investment, then it will definitely have a high current account surplus due to high exports and high inflow of investment income such as remittances, interest, dividends etc.

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