CURRENT-ACCOUNT.ppt

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1、In economics, a countrys current account is one of the two components of its balance of payments, the other being the capital account. The current account consists of the balance of trade, net primary income or factor income (earnings on foreign investments minus payments made to foreign investors)

2、and net cash transfers, that have taken place over a given period of time. The current account balance is one of two major measures of a countrys foreign trade (the other being the net capital outflow). A current account surplus increases a countrys net foreign assets by the corresponding amount, an

3、d a current account deficit does the reverse. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.To better illustrate,we should know the four components that make up of current

4、 account: goods, services, income and current transfers. 1. Goods These are movable and physical in nature, and in order for a transaction to be recorded under goods, a change of ownership from/to a resident (of the local country) to/from a non-resident (in a foreign country) has to take place. Mova

5、ble goods include general merchandise, goods used for processing other goods, and non-monetary gold. An export is marked as a credit (money coming in) and an import is noted as a debit (money going out).ServicesThese transactions result from an intangible action such as transportation, business serv

6、ices, tourism, royalties or licensing. If money is being paid for a service it is recorded like an import (a debit), and if money is received it is recorded like an export (credit).YIncome Y Income is money going in (credit) or out (debit) of a country from salaries, portfolio investments (in the fo

7、rm of dividends, for example), direct investments or any other type of investment. Together, goods, services and income provide an economy with fuel to function. This means that items under these categories are actual resources that are transferred to and from a country for economic production.YCurr

8、ent Transfers Y Current transfers are unilateral transfers with nothing received in return. These include workers remittances, donations, aids and grants, official assistance and pensions. Due to their nature, current transfers are not considered real resources that affect economic production.curren

9、t account deficitYIf an economy is running a current account deficit, it is absorbing (absorption = domestic consumption + investment + government spending) Ymore than that it is producing. This can only happen if some other economies are lending their savings to it (in the form of debt to or direct

10、/ portfolio investment in the economy) or the economy is running down its foreign assets such as official foreign currency reserve.current account surplusYOn the other hand, if an economy is running a current account surplus it is absorbing less than that it is producing. This means it is saving. As

11、 the economy is open, this saving is being invested abroad and thus foreign assets are being created.YThe balance of the current account tells us if a country has a deficit or a surplus. It is not necessarily that a deficit means a weak economy and a surplus means a strong economy.U.S. account defic

12、itsYSince 1989, the current account deficit of the US has been increasingly large, reaching close to 7% of the GDP in 2006. In 2011, it was the highest deficit in the world. New evidence, however, suggests that the U.S. current account deficits are being mitigated by positive valuation effects. That

13、 is, the U.S. assets overseas are gaining in value relative to the domestic assets held by foreign investors. The net foreign assets of the U.S. are therefore not deteriorating one to one with the current account deficits. The most recent experience has reversed this positive valuation effect, howev

14、er, with the US net foreign asset position deteriorating by more than two trillion dollars in 2008.This was due primarily to the relative under-performance of domestic ownership of foreign assets (largely foreign equities) compared to foreign ownership of domestic assets (largely US treasuries and b

15、onds).TheCausesofCurrentAccountDeficitoftheStatesYThe Low Interest Rate and Financial Policy of DeficitYThe Restrictions on the ExportYThe Continuing Increase of the Domestic ConsumptionYThe Depression of ManufacturingYThe Decline of Service IndustriesDealwith thecurrentaccount deficitYSo how to dea

16、l with current account deficit? There is no easy way out.Fiscal discipline has been key to the U.S. economic expansion, but fiscal irresponsibility was replaced by excessive household spending. When households spend more than they earn, it is difficult for government savings to make up the shortfall

17、 in savings because the import intensity of government output is about one-third the import intensity of consumer spending. So higher household consumption has a disproportionate effect on the trade deficit. Although the drop in measured household savings was particularly dramatic in 1999, a downwar

18、d trend has been apparent for 15 years. Household spending in recent years has been driven by capital gains and unrealistic expectations that wealth will continue to increase at the same rate in the future as in the recent past. In the face of a downturn in the market, U.S. consumers would tend to b

19、orrow to maintain their current consumption patterns, making them vulnerable to higher interest rates and a prolonged economic slowdown.YWhatever approach is adopted, a large real Ydepreciation of the dollar seems inevitable. The only way to reduce the pain of such an adjustment would be to ensure t

20、hat capital and labour can shift easily from non-tradeable to tradeable activitiesboth goods and some services, such as engineering and financial services. That means the government must aim for flexibility in US product and labour markets. Luckily, the US has arguably the most flexible markets in the OECD, as reflected in the fact that, despite recent shocks, unemployment has remained low.