Current Account Surplus

11 Key excerpts on "Current Account Surplus"

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  eBook - PDF

  Principles of Macroeconomics for AP® Courses 2e

  • Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
  • 2017(Publication Date)
  • Openstax

    (Publisher)

  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. If S is private saving, T is taxes, G is government spending, M is imports, X is exports, and I is investment, then for an economy with a current account deficit and a budget deficit: Supply of financial capi al = Demand for financial capi al S + (M – X) = I + (G – T) A recession tends to increase the trade balance (meaning a higher trade surplus or lower trade deficit), while economic boom will tend to decrease the trade balance (meaning a lower trade surplus or a larger trade deficit). 238 Chapter 9 | The International Trade and Capital Flows This OpenStax book is available for free at http://cnx.org/content/col23729/1.3 9.5 The Pros and Cons of Trade Deficits and Surpluses Trade surpluses are no guarantee of economic health, and trade deficits are no guarantee of economic weakness. Either trade deficits or trade surpluses can work out well or poorly, depending on whether a government wisely invests the corresponding flows of financial capital. 9.6 The Difference between Level of Trade and the Trade Balance There is a difference between the level of a country’s trade and the balance of trade. The government measures its level of trade by the percentage of exports out of GDP, or the size of the economy. Small economies that have nearby trading partners and a history of international trade will tend to have higher levels of trade. Larger economies with few nearby trading partners and a limited history of international trade will tend to have lower levels of trade. The level of trade is different from the trade balance.

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  Currency Conflict and Trade Policy

  A New Strategy for the United States

  • C. Fred Bergsten, Joseph E. Gagnon(Authors)
  • 2017(Publication Date)
  • Peterson Institute for International Economics

    (Publisher)

  The current account is the net balance between all income received from foreigners and all payments made to foreigners. Income or payments may arise from trade (in goods or services), returns on existing investments (dividends and interest), wages earned in a foreign country, or unilateral transfers (charity or remittances to family members).

  The other main category of international transactions is the financial account, which includes all purchases and sales of real or financial assets. It includes direct investment by multinational corporations, portfolio investment by individuals and financial institutions, and the extension and repayment of loans.

  A surplus in the current account means that domestic residents are receiving more income from foreigners than they are paying to foreigners. A country with a Current Account Surplus is acquiring financial assets in the rest of the world; it has a net financial outflow. In accounting terms, a net financial outflow is a surplus in the financial account.3

  In principle, the current account must equal the financial account. In practice, some transactions are not reported or are misreported. A category called “errors and omissions” is created to ensure that the accounts balance.

  What Moves the Current Account?

  Models of the current account are typically based on its trade components: exports and imports of goods and services. In the standard model of trade, known as the elasticities model, imports respond to the exchange rate and domestic economic activity (GDP) (Armington 1969 ). Exports respond to the exchange rate and foreign GDP.

  A simple model of the current account is given by

  CA = a – bRER + cGDP* – dGDP + U

  where CA denotes the current account; RER denotes the real (inflation-adjusted) exchange rate; GDP* denotes foreign GDP; U denotes a residual that allows for other factors that affect the current account; and lowercase letters denote model parameters (or elasticities). All of the parameters are positive. An exchange rate appreciation tends to reduce the current account, because it makes domestic goods more expensive to foreigners and foreign goods cheaper for domestic residents. Higher foreign GDP increases the current account, because it increases the buying power of foreign consumers and thus boosts exports. Higher domestic GDP reduces the current account, because it increases the buying power of domestic consumers and thus boosts imports.4

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  Trading Economics

  A Guide to Economic Statistics for Practitioners and Students

  • Trevor Williams, Victoria Turton(Authors)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  The reverse is also true. If a country is doing well and it is running a Current Account Surplus, its currency will tend to appreciate (though this applies to free-floating currencies, not to ones that are fixed by their government). This is because, if it is accumulating surpluses, it does not need to borrow, which means that it is paying less in interest, so people are less likely to invest in it and there is no need for it to borrow to fund a deficit. And, of course, because the current account is in surplus, Global Trade Statistics 199 they have to invest overseas to achieve balance according to accounting convention – in other words, a negative on their capital and financial account. This impact on the exchange rate obviously has implications for dif-ferent industrial sectors within the economy. We can break this down to analyse, for example, the effect on areas within manufacturing, such as food and drink and pharmaceuticals, and on the intangible elements of the economy, such as tourism and transfers. A currency that appreciates quickly, of course, can also generate inflation. If, as a country, you have a high export content in your GDP and you have to import a lot of goods in order to help to produce the goods you are exporting, then a sharply lower exchange rate can push up your inflation rate and eventually maybe lead to lower exports if it raises the price of the goods you are selling overseas. The question that needs to be uppermost for the financial market trader is this: how large is a country’s surplus or deficit relative to the size of its economy and, therefore, how sustainable is it in the short and long term? The answer will encompass an insight into what it means for those industries that drive an economy, in terms of their competitiveness and their ability to attract investment for growth.

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  Macroeconomics as a Second Language

  • Martha L. Olney(Author)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  286 Chapter 16 Open Economy Macroeconomics • Current Account Surplus • Current account deficit • Financial inflows • Financial outflows • Financial account surplus • Financial account deficit • Reserve account • Official reserve transaction (ORT) • Statistical discrepancy • Balance of payments surplus • Balance of payments deficit • Exchange rate • Foreign currency or foreign exchange • Floating exchange rates • Exchange rate regime • Fixed exchange rates • Peg • Managed (dirty) float KEY EQUATIONS • Trade balance = exports of goods and services − imports of goods and services • Balance on current account = trade balance + net factor income + net international transfer payments • Balance on financial account = financial inflows − financial outflows • Balance of payments = balance on current account + balance on financial account KEY GRAPH • Exchange rate INTERNATIONAL TRADE POLICIES When one country can produce a good relatively well and another country can produce a different good relatively well, there are economic incentives for the two countries to specialize and trade. This is the idea of the gains from trade that we first covered in Chapter 2. When one country has the comparative advantage in the production of a good because its opportunity cost of producing the good is lower than another country’s opportunity cost of producing the same good, the country should specialize in producing the good in which it has the comparative advantage in production. The other country can produce a good in which it has the comparative advantage in production. The two countries then trade. Total worldwide production and consumption of the goods increase. International trade can therefore benefit a International Trade Policies 287 country, because there are long-run gains: the country can end up with more output than it would have without trade. Some countries want to increase their exports for more immediate gains.

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  What Drives Global Capital Flows?

  Myth, Speculation and Currency Diplomacy

  • B. Brown(Author)
  • 2006(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Insights can also be gained from currency flow analysis into the so- called US current account sustainability issue (see Mann, 1999). A common cry of the dollar pessimists has been the huge size of the US current account deficit as if this could ultimately exhaust the global appetite for US dollar assets. As we shall see in a later chapter (5) that is a phantom danger, when account is taken for example of the fact that in various periods there have been huge supplies of dollar assets from non-US borrowers, whereas in the period of mega US current account deficits these foreign supplies have all but dried up. Net capital flow – present and past A table of the world current account balances provides the main insight into net global capital flows. The table shows the current account balance for each country or selected group of countries. In principle these add up to zero. In practice, there is a large and vari- able global gap – with the total of all current account balances adding up to a large negative number. The economic significance of this is discussed fully in the next chapter. For now it suffices to note that the global gap matches to a considerable extent investment income accumulating in offshore tax havens. This income is not treated as a credit in any of the IMF reporting countries. Yet the interest and div- idend payments by the respective debtors are in general registered in national balance of payments. If there were 100% accurate measurement, and national savings sur- pluses or deficits as revealed in the national income data were exactly equal to the current account balances which in turn were exactly equal to net capital flows, then we could describe the world current account as a statement of the net flow of savings from (savings) surplus coun- tries to deficit countries. In practice there are errors, and so the table of world current account balances provides only an approximation to the underlying savings flows.

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  Macroeconomic Foundations of Macroeconomics

  • Alvaro Cencini(Author)
  • 2012(Publication Date)
  • Taylor & Francis

    (Publisher)

  It is enough to observe that a commercial surplus can always be analysed as an increase in official reserves to realize, in fact, that the case under examination covers all the other alternatives. Let us therefore suppose commercial imports and exports to be equal to 40 units (millions of US dollars) respectively. If net interests paid by the indebted countries (A) to their creditors (countries R) are supposed to equal ten units, A will have to finance its current account deficit through an external loan of ten units. Now, it is very important to note at this point that A ’s borrowing required to cover the current account deficit caused by the net payment of interest is only indirectly related to this payment. In other words, interest is not paid out of A ’s foreign loan, which is part of A ’s capital and financial account. As every economist knows, interest payments and receipts are part of a country's current account, which clearly means that the payment of net interest is financed by A ’s commercial exports. Hence, given that ten of the 40 units obtained through commercial exports are being used to pay A ’s interest on debt, a new loan of an equal amount is necessary to finance the commercial imports that are no longer covered by A ’s commercial exports: the current account deficit caused by the payment of interest must be matched by a surplus of the capital and financial account. The direct payment of interest by the current account, which implies the transfer to R of part of A ’s domestic output, is thus coupled with an indirect payment corresponding to the imports of the goods and services (im i) that paying the interest leaves un-financed. The additive nature of the direct and indirect payments of interest As argued by Schmitt, the direct and the indirect payments of interest are two separate payments carried out by the economy A and the country as a whole, and it is only when they have both been covered that interest is actually paid

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  The United States as a Debtor Nation

  • William R. Cline(Author)
  • 2005(Publication Date)
  • Peterson Institute for International Economics

    (Publisher)

  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.

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  G7 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.

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  International Economics

  Global Markets and International Competition

  • Henry Thompson(Author)
  • 2000(Publication Date)
  • WSPC

    (Publisher)

  The current account deficit peaked at about 4% of GDP in 1987, with imports being 11% of GDP and exports 7% of GDP. Current account balances vary widely across countries. In 1993, Singapore had a CA surplus of 18% of GDP, and Hungary a deficit of 10%. Other relative CA balances were Switzerland 6%, Japan 2%, Germany -1 % , US -3%, and Mexico -8%. The CA balance conceals information. Canada and Mali both had relative CA deficits of -5%, but the components in Table 10.2 tell a different story. Transfers to Mali came in the form of foreign aid. The CA situation of Canada is much healthier. Table 10.2 The CA in Canada and Mali, %GDP BOT TS Nil Transfers Canada 1% -2% -4% 0% Mali -5% -13% -1% 14% Source: The Economist, 16 December 1995. The US has traditionally posted deficits in DI with US firms establishing foreign branch operations. A characteristic of DI is that management typically goes with it. When US multinational firms establish branch plants abroad, they typically maintain a high level of ownership and visible control. By contrast, European firms historically rely more on PI to finance multinational operations. Surpluses in DI during recent years have been due to an increase in branch plants of foreign multinationals in the US. There is no clear trend since the 1970s in PI, but the US generally represents a haven for investment funds. The volatility and volume of PI in recent years reflects increased activity in global financial markets. This competition has had a healthy effect. The New York Stock Exchange now competes with strong financial centers worldwide. Wealth holders have diversified portfolios inter-nationally into stocks and bonds on various international exchanges. A CA surplus in the US must be balanced by CA deficits of other countries. In recent years, Taiwan, Japan, and Germany have been predominant among countries with CA surpluses.

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  Making Sense of the Dollar

  Exposing Dangerous Myths about Trade and Foreign Exchange

  • Marc Chandler(Author)
  • 2010(Publication Date)
  • Bloomberg Press

    (Publisher)

  This is an approximately 20 percent increase from $1.4 trillion—13 percent of U.S. mutual fund assets—in 2006. 5 Currency is popular with speculators, too. Many day traders have given up on tech stocks and moved to foreign exchange. It’s not just George Soros playing the currency market, it’s the next-door neighbor, hooked up to his PC, hoping to make a quick buck. More investors are realizing that international investing isn’t just an add-on for the richest and most sophisticated but is instead a way of making money in a changing world. The supply and demand for currencies in general and the dollar in particular is also strongly influenced by some participants who are not necessarily profit maximizers in the currency market. Corporate treasurers view the fluctuations of foreign exchange values as a risk that needs to be hedged, rather than a profit opportunity. Equity fund managers also often view foreign exchange as a necessary vehicle to make a foreign investment rather a source of independent return (what market professionals call alpha). Bond-fund managers often swap or sell the currency, which effectively neutralizes the effect of foreign exchange movement on the foreign bond being purchased. Another Look at the Current Account Deficit As noted in Chapter 1, the current account deficit is the difference between the value of imports and the value of exports broadly understood. 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

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  Japan's Policy Trap

  Dollars, Deflation, and the Crisis of Japanese Finance

  • Akio Mikuni, R. Taggart Murphy(Authors)
  • 2004(Publication Date)
  • Brookings Institution Press

    (Publisher)

  It simply sup-ports idle dollars. The drain created by Japan’s idle dollars is illustrated in figure 1-9, which shows the money supply (defined as M2 plus CDs) minus those dollars. Domestic credit needs must be met from what remains. When enough money is drained from a financial system, deflation—falling prices—follows and with it economic slowdown. To put Japan’s dilemma in other terms, the workers and suppliers who are paid in yen to earn excess dollars do not produce anything that is ulti-mately exchanged with other Japanese. They produce things for foreigners. If the foreigners in turn produced things that were bought by Japanese, that would not be a problem. But they do not—that is what it means to have endlessly accumulating trade surpluses. And the deposits that go to pay the 100 200 300 400 500 600 Yen, trillions 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 The amount of accumulated Current Account Surplus (M2+CD) – The amount of accumulated Current Account Surplus M2+CD Figure 1-9. Money Supply Less Accumulated Current Account Surplus Sources: Financial and Economic Statistics Monthly, Bank of Japan; Balance of Payments, Ministry of Finance and Bank of Japan. Calculated, arranged, and estimated by Mikuni & Co. © 2002 Mikuni & Co., Ltd. 28 The Policy Trap Japanese who have produced things for foreigners without return represent a drain on the Japanese economy. U.S. Deficits and Japan’s Dollar Surpluses The dollars held by Japanese entities are claims on the U.S. Federal Reserve System, exercisable directly or indirectly through U.S. banks. It does not matter whether deposit holders at the Federal Reserve are U.S. nationals or foreigners. When American entities pay for imports by wiring dollars to an exporter’s account—which they typically do—those dollars never leave the U.S.

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