【正文】 = X M. The macro meaning of the current account balance ? To summarize: current account balance equals: 1. Net foreign investment 2. The difference between national saving and domestic investment 3. The difference between domestic product and national expenditure ? If a country has a current account surplus: 1. The country has positive foreign investment (that is, the country is acting as a lender to or investor in the rest of the world) 2. The country is saving more than it is investing domestically 3. The country is producing more (and has more ine from this production) than it is spending on goods and services. The macro meaning of the current account balance ? If a country has a current account deficit, the country is a foreign borrower, its domestic saving less than domestic investment and spending more than production (or ine). ? These identities help us to see what must be changed if the current account balance is to be changed. ? For instance, consider a country that seeks to reduce its CA deficit. An improvement in the country’s current account balance must be acpanied by an increase in the value of domestic product (Y) relative to the value of national expenditure (E). If domestic production cannot expand much, then national spending must fall in order to decrease imports or to permit more local production to be exported. The macro meaning of the current account balance ? For instance, the US has evolved from a exporter and lender after World War II to a importer and borrower. Up through the 1960s, the US had a positive current account balance and a positive trade balance. The US was a exporter and lender largely because Europe and Japan, still recovering from World War II, badly needed American goods and loans ( and foreign aid under the Marshall Plan). ? During the 1970s and up through 1981, a new pattern began to emerge. The US became a importer of goods and services, but still kept its current account approximately in balance, thanks largely to interest and profit earnings on previous foreign investments. ? After 1982, the US shifted into dramatic trade and current account deficits, being the world’s largest borrower. The underlying reason: Led by new federal government deficits, the US cut its rate of national saving much faster than its domestic investment and therefore borrowed heavily from Japan and other countries. The deficits declined in the late 1980s, but then began to grow again after 1991. (the current account deficit for 1991 was unusually low because of transfer payments from the allied countries to US related to Operation Desert Storm against Iraq.) The macro meaning of the current account balance ? Japan’s goods and services balance and current account balance were nearly the same until the mid – 1980s. These typically have been in surplus since the early 1960s. ? The surpluses became large and controversial in the 1980s, ad Japanese goods gained major shares of foreign markets. Of course, the other way to look at this is that Japan’s foreign investment (If =CA 0) became large in the mid 1980s. In those years Japanese foreign investment, including heavy lending to the US, became the dominant force in international finance (although its role then diminished in the 1990s). Behind this shift to foreign lending in the early and mid 1980s lay a widening gap between Japan’s high national savings and its domestic capital formation. (CA = If +S – Id0) Questions and Problems ? What is the current account balance of a nation with a government budget deficit of $128 billion, private saving of $806 billion, and domestic capital formation of $777 billion? Reference answers ? National saving S equals private saving plus government saving (or dissaving if the government budget is in deficit). For this country, national saving equals $678 billion (or $806$128). ? The current account balance equals the difference between national saving and domestic real investment (Id). For this country, the current account balance is a deficit of $99 billion (or $678 $777). Assignment ? A country is better off running a current account surplus rather than a current account deficit? Do you agree no disagree? Explain.