CURRENT-ACCOUNT.ppt

CurrentAccount,changesinnetforeignassets,Ineconomics,acountryscurrentaccountisoneofthetwocomponentsofitsbalanceofpayments,theotherbeingthecapitalaccount.Thecurrentaccountconsistsofthebalanceoftrade,netprimaryincomeorfactorincome(earningsonforeigninvestmentsminuspaymentsmadetoforeigninvestors)andnetcashtransfers,thathavetakenplaceoveragivenperiodoftime.Thecurrentaccountbalanceisoneoftwomajormeasuresofacountrysforeigntrade(theotherbeingthenetcapitaloutflow).Acurrentaccountsurplusincreasesacountrysnetforeignassetsbythecorrespondingamount,andacurrentaccountdeficitdoesthereverse.Bothgovernmentandprivatepaymentsareincludedinthecalculation.Itiscalledthecurrentaccountbecausegoodsandservicesaregenerallyconsumedinthecurrentperiod.,Tobetterillustrate,weshouldknowthefourcomponentsthatmakeupofcurrentaccount:goods,services,incomeandcurrenttransfers.,1.GoodsThesearemovableandphysicalinnature,andinorderforatransactiontoberecordedundergoods,achangeofownershipfrom/toaresident(ofthelocalcountry)to/fromanon-resident(inaforeigncountry)hastotakeplace.Movablegoodsincludegeneralmerchandise,goodsusedforprocessingothergoods,andnon-monetarygold.Anexportismarkedasacredit(moneycomingin)andanimportisnotedasadebit(moneygoingout).,Services,Thesetransactionsresultfromanintangibleactionsuchastransportation,businessservices,tourism,royaltiesorlicensing.Ifmoneyisbeingpaidforaserviceitisrecordedlikeanimport(adebit),andifmoneyisreceiveditisrecordedlikeanexport(credit).,IncomeIncomeismoneygoingin(credit)orout(debit)ofacountryfromsalaries,portfolioinvestments(intheformofdividends,forexample),directinvestmentsoranyothertypeofinvestment.Together,goods,servicesandincomeprovideaneconomywithfueltofunction.Thismeansthatitemsunderthesecategoriesareactualresourcesthataretransferredtoandfromacountryforeconomicproduction.,CurrentTransfersCurrenttransfersareunilateraltransferswithnothingreceivedinreturn.Theseincludeworkersremittances,donations,aidsandgrants,officialassistanceandpensions.Duetotheirnature,currenttransfersarenotconsideredrealresourcesthataffecteconomicproduction.,currentaccountdeficit,Ifaneconomyisrunningacurrentaccountdeficit,itisabsorbing(absorption=domesticconsumption+investment+governmentspending)morethanthatitisproducing.Thiscanonlyhappenifsomeothereconomiesarelendingtheirsavingstoit(intheformofdebttoordirect/portfolioinvestmentintheeconomy)ortheeconomyisrunningdownitsforeignassetssuchasofficialforeigncurrencyreserve.,currentaccountsurplus,Ontheotherhand,ifaneconomyisrunningacurrentaccountsurplusitisabsorbinglessthanthatitisproducing.Thismeansitissaving.Astheeconomyisopen,thissavingisbeinginvestedabroadandthusforeignassetsarebeingcreated.Thebalanceofthecurrentaccounttellsusifacountryhasadeficitorasurplus.Itisnotnecessarilythatadeficitmeansaweakeconomyandasurplusmeansastrongeconomy.,U.S.accountdeficits,Since1989,thecurrentaccountdeficitoftheUShasbeenincreasinglylarge,reachingcloseto7%oftheGDPin2006.In2011,itwasthehighestdeficitintheworld.Newevidence,however,suggeststhattheU.S.currentaccountdeficitsarebeingmitigatedbypositivevaluationeffects.Thatis,theU.S.assetsoverseasaregaininginvaluerelativetothedomesticassetsheldbyforeigninvestors.ThenetforeignassetsoftheU.S.arethereforenotdeterioratingonetoonewiththecurrentaccountdeficits.Themostrecentexperiencehasreversedthispositivevaluationeffect,however,withtheUSnetforeignassetpositiondeterioratingbymorethantwotrilliondollarsin2008.Thiswasdueprimarilytotherelativeunder-performanceofdomesticownershipofforeignassets(largelyforeignequities)comparedtoforeignownershipofdomesticassets(largelyUStreasuriesandbonds).,TheCausesofCurrentAccountDeficitoftheStates,TheLowInterestRateandFinancialPolicyofDeficitTheRestrictionsontheExportTheContinuingIncreaseoftheDomesticConsumptionTheDepressionofManufacturingTheDeclineofServiceIndustries,Dealwiththecurrentaccountdeficit,Sohowtodealwithcurrentaccountdeficit?Thereisnoeasywayout.FiscaldisciplinehasbeenkeytotheU.S.economicexpansion,butfiscalirresponsibilitywasreplacedbyexcessivehouseholdspending.Whenhouseholdsspendmorethantheyearn,itisdifficultforgovernmentsavingstomakeuptheshortfallinsavingsbecausetheimportintensityofgovernmentoutputisaboutone-thirdtheimportintensityofconsumerspending.Sohigherhouseholdconsumptionhasadisproportionateeffectonthetradedeficit.Althoughthedropinmeasuredhouseholdsavingswasparticularlydramaticin1999,adownwardtrendhasbeenapparentfor15years.Householdspendinginrecentyearshasbeendrivenbycapitalgainsandunrealisticexpectationsthatwealthwillcontinuetoincreaseatthesamerateinthefutureasintherecentpast.Inthefaceofadownturninthemarket,U.S.consumerswouldtendtoborrowtomaintaintheircurrentconsumptionpatterns,makingthemvulnerabletohigherinterestratesandaprolongedeconomicslowdown.,Whateverapproachisadopted,alargerealdepreciationofthedollarseemsinevitable.Theonlywaytoreducethepainofsuchanadjustmentwouldbetoensurethatcapitalandlabourcanshifteasilyfromnon-tradeabletotradeableactivitiesbothgoodsandso