Economics
Current Account Deficit
A current account deficit occurs when a country's imports exceed its exports, leading to a negative balance of trade. It reflects a net outflow of domestic currency to foreign markets and can indicate a reliance on foreign financing. A sustained deficit may impact a country's currency value and overall economic stability.
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11 Key excerpts on "Current Account Deficit"
- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
In most high-income economies, goods comprise less than half of a country’s total production, while services comprise more than half. The last two decades have seen a surge in international trade in services; however, most global trade still takes the form of goods rather than services. The current account balance includes the trade in goods, services, and money flowing into and out of a country from investments and unilateral transfers. 9.2 Trade Balances in Historical and International Context The United States developed large trade surpluses in the early 1980s, swung back to a tiny trade surplus in 1991, and then had even larger trade deficits in the late 1990s and early 2000s. As we will see below, a trade deficit necessarily means a net inflow of financial capital from abroad, while a trade surplus necessarily means a net outflow of financial capital from an economy to other countries. 9.3 Trade Balances and Flows of Financial Capital International flows of goods and services are closely connected to the international flows of financial capital. A Current Account Deficit means that, after taking all the flows of payments from goods, services, and income together, the country is a net borrower from the rest of the world. A current account surplus is the opposite and means the country is a net lender to the rest of the world. 9.4 The National Saving and Investment Identity The national saving and investment identity is based on the relationship that the total quantity of financial capital supplied from all sources must equal the total quantity of financial capital demanded from all sources.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
In most high-income economies, goods comprise less than half of a country’s total production, while services comprise more than half. The last two decades have seen a surge in international trade in services; however, most global trade still takes the form of goods rather than services. The current account balance includes the trade in goods, services, and money flowing into and out of a country from investments and unilateral transfers. 10.2 Trade Balances in Historical and International Context The United States developed large trade surpluses in the early 1980s, swung back to a tiny trade surplus in 1991, and then had even larger trade deficits in the late 1990s and early 2000s. As we will see below, a trade deficit necessarily means a net inflow of financial capital from abroad, while a trade surplus necessarily means a net outflow of financial capital from an economy to other countries. 10.3 Trade Balances and Flows of Financial Capital International flows of goods and services are closely connected to the international flows of financial capital. A Current Account Deficit means that, after taking all the flows of payments from goods, services, and income together, the country is a net borrower from the rest of the world. A current account surplus is the opposite and means the country is a net lender to the rest of the world. 10.4 The National Saving and Investment Identity The national saving and investment identity is based on the relationship that the total quantity of financial capital supplied from all sources must equal the total quantity of financial capital demanded from all sources.
eBook - PDFTrading Economics
A Guide to Economic Statistics for Practitioners and Students
- Trevor Williams, Victoria Turton(Authors)
- 2014(Publication Date)
- Wiley(Publisher)
If you have a Current Account Deficit with the rest of the world, it means that you have to borrow money from overseas in order to be able to pay for it. This is measured in what is called the capital and financial account, which therefore balance out the current account position. The principle is that those accounts capture flows in and out of the country in terms of investments in the UK and returns on those investments – all measured by the capital and financial accounts, which, net, must be equal and opposite to the Current Account Deficit. If there is a surplus on the current account, the capital/financial account is in deficit because money is clearly flowing out, whereas money flows in (you borrow) when the current account is in deficit. We also need to factor in the country’s Official Reserves or, in other words, how much a country has sitting in foreign currency or gold in order to help finance trade in the short-term. WHY DO WE MEASURE THE BALANCE OF PAYMENTS? Measuring the balance of payments provides a sense of how a country is performing in relation to other economies on the global stage, in terms of both physical and intangible goods as well as the economy’s asset and liability position on its balance sheet. Changes in these balances tell you a great deal about the waxing and waning fortunes of those categories that make up an economy, i.e. about export firms, manufacturers, the services sector and the overall 198 Trading Economics wealth of the nation. What drives the current account is demand for a country’s goods and services from overseas, which means that a country needs to be competitive and to be offering the goods and services that people want to buy. This means that a country needs to have both high productivity and low unit wage costs, as we saw in Chapter 4, to enable it to produce goods that offer more value for money than elsewhere (these might not necessarily have to be cheaper, though they frequently are).
No longer available |Learn more- William R. Cline(Author)
- 2005(Publication Date)
Although he laments that ‘‘for the developing world to be lending large sums on net to the mature industrial economies is quite undesirable,’’ he sees little reason why the adjustment process should not be smooth. He expects that ‘‘the various factors underlying the U.S. Current Account Deficit— both domestic and international—are likely to unwind only gradually. . .’’ and that ‘‘we probably have little choice except to be patient as we work to create the conditions in which a greater share of global saving can be redirected away from the United States and toward the rest of the world— particularly the developing nations’’ (2005, 14). This view undoubtedly contains a kernel of truth. For example, the decline in East Asian investment rates no doubt contributed to weaker exchange rates and a shift of demand from investment to exports. How-ever, there is no reason that the entirety of the external impact should have shown up in the US external deficit rather than being much more widely dispersed, in the absence of strong domestic US influences and especially fiscal erosion to shape this outcome. Ultimately, the argument, which amounts to saying that the US Current Account Deficit is mainly attributable to causes from abroad rather than policies and behavior at home, is unconvincing. Worse, it is counterproductive in terms of keeping attention focused on the need to implement forceful US fiscal adjustment. At one level, the statement that the US Current Account Deficit represents a global saving glut is a tautology. By definition, the current account equals the excess of investment over domestic saving. Also by definition, if the United States has a Current Account Deficit, the rest of the world in the aggregate has a corresponding current account surplus (aside from statistical discrepancies). If ‘‘glut’’ is defined as ‘‘excess,’’ then it follows that the rest of the world has a saving glut and the United States has a saving ‘‘dearth’’ or shortfall.
eBook - PDFG7 Current Account Imbalances
Sustainability and Adjustment
- Richard H. Clarida(Author)
- 2007(Publication Date)
- University of Chicago Press(Publisher)
1C.1 United States: Current Account Deficit and GDP growth Source: IMF. 2. Here I use the broad index of the real exchange rate reported by the Federal Reserve. An increase in this index represents a real appreciation. Current Account Deficit is driven by consumption, not investment-financing. This is consistent with traditional models that predict that in the absence of investment in the tradable sector, a larger deprecia-tion is needed to reallocate resources to restore external balance (fig-ure 1C.2). • The reversal of the Current Account Deficit in the mid-1980s came with a surge of U.S. capital flows to emerging markets. Indeed, the surge of capital flows to emerging economies documented by Calvo, Leider-man, and Reinhart (1993) occurred when the demand of the United States for foreign financing declined (figure 1C.3). They suggest that this phenomenon was caused by push factors, to a large extent inde-pendent of developments in the emerging economies themselves. Fig-ure 1C.3 shows that in recent years capital flows to emerging markets have been increasing, but mostly to Asia, particularly China, which is receiving the bulk of capital flows. In the case of China, these inflows have not financed a Current Account Deficit but have been used prima-rily for reserve accumulation to ward o ff an appreciation of the ren-minbi. In contrast, emerging markets with floating exchange rates, in particular in Latin America, have seen very small net inflows as they have been running current account surpluses. Therefore, the availabil-ity of foreign financing for emerging markets should rise as the U.S. Current Account Deficit narrows. Sooner or later there must be a reversal. The issue is whether this rever-sal will be costly and what repercussions it will have on the global economy. 58 Pierre-Olivier Gourinchas and Hélène Rey Fig. 1C.2 United States: Current Account Deficit and the real exchange rate Source: IMF and U.S. Federal Reserve.
eBook - PDFPractical Financial Economics
A New Science
- Austin Murphy(Author)
- 2003(Publication Date)
- Praeger(Publisher)
The disastrous implications of this phenomenon on U.S. security markets was described in Chapter 1. 10 178 Practical Financial Economics INTRODUCTION One of the problems mentioned in the introductory chapter of this book for U.S. stocks and profits was related to the international trade situation of the United States. There it was mentioned that the U.S. trade situation was not particularly conducive to a positive stock market environment. This final chapter examines the crucial problem of trade imbalances in great detail and precisely models their effect on currency values, thereby showing the magnitude of the problem faced by the United States. Trade imbalances can serve to optimize satisfaction of heterogeneous de- mand preferences and even make investment/output decisions more efficient, but any resulting current-account deficits generally must eventually be reversed so that the financing for the deficits can be repaid (Obstfeld and Rogoff 1995). A current-account deficit can be accompanied by high levels of productive investment (especially imported foreign investments), which may lead to a future reversal in the trade imbalance if that investment begins to create pro- ductivity improvements (and thereby enhance competitiveness in internation- ally traded goods and services). However, it is often the case empirically that a current-account deficit is at least partially caused by overborrowing to fi- nance excessive consumption (or overbuilding in industries, like real estate, which do not produce goods or services that are internationally traded) and therefore cannot correct itself without having an adverse effect on other vari- ables like exchange rates and income (McKinnon and Pill 1996). Chronic current-account deficits represent an especially serious situation that has to be addressed (Yusoff 1997).
eBook - ePubMaking Sense of the Dollar
Exposing Dangerous Myths about Trade and Foreign Exchange
- Marc Chandler(Author)
- 2010(Publication Date)
- Bloomberg Press(Publisher)
The result is a number, not a score for the economy. By definition, the deficit will widen if imports increase by more than exports. Likewise, it will narrow if imports decrease more than exports decrease. The U.S. Current Account Deficit was a hefty $174 billion in the third quarter of 2008. 6 But it’s not the amount that matters so much as why it changes from quarter to quarter. That’s often not a simple matter to determine. Exchange rates matter, of course, but if politicians are obsessed with the trade deficit, then they may pursue policies that generate negative outcomes elsewhere and not necessarily resolve the trade deficit. That can wreak havoc with other sectors of the domestic economy and with key sectors in international trade, especially international direct investment and financial services. If the dollar is weak, then U.S. goods might cost less for people using other currencies, depending on a host of decisions made on the business level such as hedge strategy, competition, and elasticity of demand. A weak dollar might help U.S. exports. But the best thing for U.S. exports is strong foreign demand. U.S. exports were indeed strong in the middle of this decade when the dollar was weak, but U.S. exports were also strong in the second half of the 1990s when the dollar was strong. Foreign demand for U.S. goods is more sensitive to a country’s growth than the level of the dollar. And, if the dollar is weak, imported goods may become more expensive for people paying with dollars, so Americans might buy fewer imports. However, the reduction of demand for imports tends to correspond to what economists call “demand destruction” or, more broadly, economic weakness. Often it is difficult to separate the impact of weaker growth (e.g., lower interest rates) from a weaker dollar for narrowing of the U.S. Current Account Deficit during recessions. The U.S. Current Account Deficit improved sharply in the 2006- 2008 period, but most Americans were worse off
eBook - PDFUnited Kingdom Balance of Payments 2006
The Pink Book
- NA NA(Author)
- 2017(Publication Date)
- Palgrave Macmillan(Publisher)
Current account The Pink Book: 2006 edition Chapter 1 Summary of balance of payments Current account The UK has recorded a Current Account Deficit in every year since 1984. Prior to 1984, the current account recorded a surplus in 1980 to 1983. Since the last surplus was recorded in 1983, there have been three main phases in the development of the current account. In the first phase, from 1984 to 1989, the Current Account Deficit increased steadily to reach a high of f26.3 billion in 1989 (equivalent to -5.1 per cent of GDP); during the second phase, from 1990 until 1997, the Current Account Deficit declined to a low of fO.8 billion in 1997; in the third phase, since 1998, the Current Account Deficit has widened sharply. The deficit in 2005, at f26.6 billion, is the highest recorded in cash terms but only equates to -2.2 per cent of GDP. The profile for the current account has historically followed that of trade in goods, its biggest and most cyclical component. For a while, at the end of the 1990s, that pattern changed, but in recent years the pattern has remerged and the increasing deficit on trade in goods is mirrored by an increase in the Current Account Deficit. The last trade in goods surplus, recorded in 1982, was the main driver of a current account surplus . Following 1982, the goods balance went into deficit and this increased to a peak of f24.7 billion in 1989, while the current balance deteriorated to a deficit of f26.3 billion. From 1989 until the late-1990s, both the trade in goods and Current Account Deficits fell and then subsequently rose. From 1999 to 2003 the goods deficit continued to grow but the Current Account Deficit stabilised, due to a widening income surplus. From 2004, the deficit on trade in goods has increased steadily, matched by a rise in the Current Account Deficit.
- Altug Murat Köktas, Ahmet Arif Eren(Authors)
- 2019(Publication Date)
- Peter Lang Group(Publisher)
The relationship between budget balance and current account balance, exis- tence of a unidirectional causality relationship from the Current Account Deficit to the budget deficit in the basic economic theories, the existence of a bidirectional Triple Deficits Case 331 causality relationship between two deficits and no relationship between two deficits have been proposed in different directions. One of these traditional views is absorption theory put forward by Keynesian approach. According to Keynesian absorption theory, an increase in budget deficit refers to an increase in demand for goods and services more than an increase in output or an increase in domestic absorption. According to absorption theory, a fiscal expansion in the form of a tax rate reduction or an increase in government spending reduces national savings, increases private disposable income and increases demand for imported goods and services. As a result, the current account balance deteriorates (Senadza & Aloryito, 2016: 56–57). In this respect, the increase in budget deficits inevitably increases private savings, as the Current Account Deficit will not change since imports will not be affected. From the perspective of the Keynesian income-expenditure approach and the two approaches that show that it can be explained by the Mundell-Fleming (MF) Model under the conditions of open economy and high capital mobility, which are behind the twin deficits hypothesis, increases in budget deficits will increase domestic absorption (C+I+G) and national income. The increase in income will lead to imports and as a result will increase the trade balance as a part of the cur- rent account or increase the deficit and thus ensure that public and external sector deficits act as twin sisters (Ogbonna, 2014: 144).
eBook - PDFThe Economics of Adjustment and Growth
Second Edition
- Pierre-Richard Agénor, Pierre-Richard Agénor(Authors)
- 2004(Publication Date)
- Harvard University Press(Publisher)
This equation is obtained by rearranging the accounting identities relating gross national income on an expenditure basis and an income basis. It indicates that the counterpart to the current account balance (or foreign saving) is government dissaving or an excess of private investment over private saving. The implication of Equation (8) is that, as long as I p S p remains stable, changes in fiscal deficits will be closely associated with movements in Current Account Deficits. There is some empirical evidence suggesting that this is indeed the case (see Chinn and Prasad, 2003). In general, however, this may not always be the case. As discussed in Chapter 2, an increase in public expenditure may lead to a concomitant reduction of private investment (as a result of a crowding-out e ect through the credit market) with all other components unchanged; or, private saving may increase, as individuals anticipate the rise in future taxes that they may incur as a result of the need to service the higher level of public debt occurring today. Thus, the correlation between fiscal and external deficits depends on the e ect of fiscal policy on the private sector’s investment and saving decisions. In addition, fiscal deficits may respond to , rather than cause , changes in the current account. Both e ects also suggest that the so-called Lawson doctrine –according to which large Current Account Deficits resulting from an excess of private investment over saving should not be a cause for concern–is in general misleading. 3.6 Consistency and Sustainability An integrated framework for assessing empirically the consistency between fiscal policy and macroeconomic targets (such as inflation, output growth, and real interest rates) was proposed by Anand and van Wijnbergen (1989). This section begins by presenting a discrete-time version of their model and discusses its limitations. The analysis is then extended to consider jointly the issues of fiscal and external sustainability.
eBook - PDFInternational Macroeconomics
A Modern Approach
- Stephanie Schmitt-Grohé, Martín Uribe, Michael Woodford(Authors)
- 2022(Publication Date)
- Princeton University Press(Publisher)
current account? In particular, we wish to know whether the recent rise and fall in the Current Account Deficit was primarily driven by domestic or external factors. 7.6.1 TWO COMPETING HYPOTHESES Observers have argued that the deterioration in the U.S. Current Account Deficit was caused by external factors. 1 This view is known as the global saving glut hypoth- esis. In particular, it argues that the rest of the world experienced a heightened desire to save but did not have incentives to increase domestic capital formation in a com- mensurate way. As a result, the current account surpluses of the rest of the world had to be absorbed by Current Account Deficits in the United States. Much of the increase in the desired current account surpluses in the rest of the world during this period originated in higher desired saving in emerging market economies. In particular, the saving glut hypothesis attributes the increase in the desire of emerging countries to save to two factors. One factor is an increase in foreign reserve accumulation to avoid or be better prepared to face future external crises of the type that had afflicted emerging countries in the 1990s. The second factor is a government-induced foreign currency depreciation aimed at promoting 1 See, among others, Ben S. Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit,” Homer Jones Lecture, St. Louis, Missouri, April 14, 2005. 152 Chapter 7 Global saving glut hypothesis 0 r CA RWʹ (r) CA RW (r) CA RW CA RW CA RW (r) CA US (r) CA US 1 CA US 1 CA US 0 CA US 0 CA US CA US CA USʹ (r) CA US (r) r* 0 r* 0 r* 1 r* 1 B A “Made in the U.S.A.” hypothesis 0 r B A Figure 7.4. U.S. Current Account Deficits: Global Saving Glut or Made in the U.S.A.? export-led growth. Advocates of the global saving glut view also cite an external factor originating in developed countries; namely, an increase in saving rates in preparation for an aging population.
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