Saving and the Current Account

12 Key excerpts on "Saving and the Current Account"

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  Shaking the Invisible Hand

  Complexity, Endogenous Money and Exogenous Interest Rates

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

    (Publisher)

  Total saving remains the accounting record of total investment: I Ip Ig Sp S (7.12) Conversely suppose at the other extreme government tax receipts equal total government spending, so the government budget is balanced on capital account (T Cg Ig). All government investment is financed internally by government saving. Government borrowing is then zero, and private saving finances private investment. Total saving remains the accounting record of total investment. S Sp Sg Ip Ig I (7.13) 7.4 Words and terms: “saving” in economics is intransitive A more insidious reason why the profession has failed to recognize that “saving” is simply the accounting record of investment is the unfortunate choice of the common verb “to save,” with its robust colloquial transitive meanings to designate an economic term that is an intransitive accounting definition. The result is perhaps the most damaging fallacy of composition ever to have confounded macroeco- nomics. Since capital gains and losses are not included in the accounting definition of National Income, saving cannot be defined as what it is intended to be, the addi- tion to the agents’ net worth, unless all asset prices remain constant or unless wealth is valued at historical cost and not at current market prices. For this reason Keynes was forced to define saving somewhat clumsily what it was not, “income not consumed.” 29 Keynes’ definition of saving was not immediately unanimously accepted. Although now largely unread, a large economic literature appeared in the 1930s on the identity between saving and investment. This literature for the 164 Shaking the Invisible Hand most part accepted the linguistic presumption that saving and investment were separate behavioral and volitional relationships and attempted to puzzle out and describe the manner how and why they were brought into equality.

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  Principles of International Finance and Open Economy Macroeconomics

  Theories, Applications, and Policies

  • Cristina Terra(Author)
  • 2015(Publication Date)
  • Academic Press

    (Publisher)

  The balance of payments registers all the international transactions of a country, and it is part of the National Accounts system, which registers economic activity based on a standardized accounting system between nations. This chapter describes the balance of payments and the main aggregates of the National Accounts. We show that the current-account balance results from the difference between the economy’s aggregate savings and investment. We discuss the notion of equilibrium of the balance of payments as well as the condition for sustainability of current account deficits. Finally, we discuss the main hypothesis of different open economy models regarding the functioning of the goods, assets, and money markets.

  Keywords

  Balance of payments; national accounts; gross domestic product; net international investment position; sustainability of current account deficits

  Chapter Outline

  2.1 Balance of Payments  10

  2.1.1 Current Account  10

  2.1.2 Capital Account  12

  2.1.3 Financial Account  12

  2.2 National Accounts  15

  2.3 Balance of Payments Equilibrium  18

  2.3.1 Sustainability of Current-Account Deficits  20

  2.4 Open Economy Models  26

  Mathematical Appendix  27

  2.5 Exercises  28

  What economic variables should be analyzed to determine if there is risk of a balance of payments crisis; if the trajectory of foreign debt is sustainable; if the exchange rate is overvalued? Although an answer to each of these questions would require extensive study, based on an analysis of the economy and its relationship with other countries, let us begin by defining the object of our study. The balance of payments accounts for the transaction of goods, services, and assets between the residents of one country and those of the rest of the world. It is connected to the system of national accounts, which is a systematic structure for presenting the macroeconomic statistics of a country.

  Sections 2.1 and 2.2 begin with a presentation of the basic structure of each of these accounting systems. Their objective is to identify the relevant statistics necessary to design an analytical framework of the macroeconomic situation of the country and its relation to the rest of the world. Section 2.3 discusses the idea of equilibrium in the balance of payments, and Section 2.4

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  Principles of Macroeconomics for AP® Courses 2e

  • 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.

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  Principles of Macroeconomics 2e

  • 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.

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  Principles of Macroeconomics 3e

  • David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  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. 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: 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).

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  Principles of Economics 3e

  • Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  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. 23.2 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. 23.3 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. 23.4 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: 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).

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  Principles of Economics 2e

  • 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. 23.2 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. 23.3 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. 23.4 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.

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  Principles of Macroeconomics

  • Steven A. Greenlaw, Timothy Taylor(Authors)
  • 2014(Publication Date)
  • Openstax

    (Publisher)

  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. 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 capital = Demand for financial capital 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).

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  Removing Obstacles to Economic Growth

  • Michael L. Wachter, Susan M. Wachter, Michael L. Wachter, Susan M. Wachter(Authors)
  • 2016(Publication Date)
  • University of Pennsylvania Press Anniversary Collection

    (Publisher)

  2 An issue that has received insufficient attention in the literature is the great difficulty in measuring saving. For the most part, we have very little direct data regarding saving. Most authors determine sav-ing as the residual of somewhat erroneous income data and highly questionable consumption figures. This paper uses a different ap-proach. Saving is probably best thought of as the change in, or accu-mulation of wealth. That is, the amount a person, household, firm, or government has saved during a year is the increment in the net wealth of the person or institution. The most straightforward way, then, to measure saving is to compare two balance sheets (one at the beginning and one at the end of the period) of the entity under con-sideration. If both balance sheets are expressed in the same units (such as dollars of constant purchasing power), then saving will just equal the change in net worth. The problem with implementing this approach is that we have little wealth data for the U.S. Detailed cross-section household wealth data is extremely scarce and the distortions caused by inflation create many difficulties in computing real corporate balance sheets. The gov-Saving in the U.S. Economy 189 ernment sector is the worst in that no official attempt is made to construct balance sheets. The assets of governments, including de-fense equipment, social overhead capital, and large natural resource holdings, are particularly difficult to value. Attempts are being made, including an ambitious project currently directed by Michael Boskin at Stanford. The point that should be recognized, however, is that measuring saving, which is most fundamentally defined as the change in net worth, is at least as difficult as gauging net worth itself. There are at least two sets of national balance sheets available; those compiled by Raymond Goldsmith (1982) and those prepared by the Flow-of-Funds division of the Federal Reserve System (1983).

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  Financial Literacy and Money Script

  A Caribbean Perspective

  • Christine Sahadeo(Author)
  • 2018(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  accounts on offer.

  Commercial banks offer a range of accounts to save money including Ordinary Savings Account , Current Account , Time Savings Deposit Account , and Foreign Exchange Deposits . Ordinary Savings Accounts allow you to access your money at any time and the interest rate it carries is generally low. Interest is paid on the average balance kept in the account for the month. Current Accounts allow you to write checks which is useful in particular if you are operating a business. Normally it does not pay interest although some may pay interest if the account balance is greater than a pre-specified amount. This type of account may carry a service charge.

  A Time Savings Deposit Account is similar to aFixed Deposit . The money must be left for a period of time whereby interest rates are progressively higher for larger deposits and those placed for longer periods. When the account is opened, the time, amount, and interest rate will be agreed with the bank and constitutes a contract which has implications if the deposit is cashed in at an earlier date. If you request repayment of deposit before the pre-appointed time, most of the interest earned would not be paid for breach of contract.

  Most financial institutions offer deposits account in currencies other than the country’s currency. Savings in credit unions operate via membership arrangements. Deposits of funds are deemed to be shares purchased and not termed “deposits” as in banks and other financial institutions. A member of the credit union does not receive interest income but rather a dividend, a share of the profit of the institution. Credit unions generally offer lower interest rates than commercial banks

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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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  Turbulent Waters

  Cross-Border Finance and International Governance

  • Ralph C. Bryant(Author)
  • 2004(Publication Date)
  • Brookings Institution Press

    (Publisher)

  When accoun-tants consolidate the financial system as a whole, the inside assets and lia-bilities wash out. What remains in the consolidation are the assets of the ultimate savers who hold claims on the financial reservoir and the liabilities of the ultimate investors who have borrowed from it. Next, consider several fundamental points about money. For efficient transactions, the economy requires an agreed unit of account and an asset that can be used as a means of payment (sometimes referred to as a medium of exchange or a transactions medium). An asset usable as a means of pay-ment may also be regarded by some actors in the economy as a store of value. No advanced economy and its financial system have functioned without an agreed unit of account and some asset, or assets, readily and widely usable as a means of payment. Assets readily and widely usable as a means of payment are typically referred to as money. The money assets typically held by households and businesses are deposits in commercial banks and other privately owned financial inter-mediaries, plus a modest amount of currency notes and coins. In so-called narrower statistical definitions of money, the deposits may be only demand deposits. Broader statistical definitions may include time and savings deposits as well, and possibly even still other types of short-term claims on private financial intermediaries. Vast amounts of ink have been spilled on the subject of which definition of money is the most appropriate for macroeconomic analysis. Fortunately, that issue is not relevant here. 15 15. My own contributions to the sea of ink about the definition of money include Bryant (1980b, 1983). 38 Financial Activity in a Closed Economy It is necessary, however, to distinguish between reserve money and inside money. Reserve money assets are means-of-payment liabilities of the mone-tary authority, typically the central bank.

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