Current account

The current account covers international flows of goods, such as transfers between home and abroad in the framework of economic balance of payments.

The balance of the current account represents an important economic factor for evaluating the performance of an economy

The current account balance is a quantity that is monitored in the overall accounts imbalance procedure of the European Union.

• 2.1 current account surplus
• 2.2 Current account deficit
• 2.3 Use and importance of the current account balance

• 5.1 Mathematical derivation
• 5.2 model of a small economy 5.2.1 assumptions

• 5.3.1 world market interest rate
• 5.3.2 Fiscal policy
• 5.3.3 Terms of Trade
• 5.3.4 Trade Policy

Power balance in the system of national accounts

The balance of payments covers all economic transactions between the domestic and abroad within a year. You can be in rough balance split into two. On the one hand there is the financial account, which includes financial transactions, and on the other hand, the current account, which includes all revenue and expenditure of the economy, including imports and exports of goods. The current account can be divided into four sub-accounts:

• The trade balance with the exported and imported goods
• The balance of services with the services of travel, transport and insurance services
• The transfer balance with the provision and receipt of private (known as " remittances " ) and public transfers ( ie transfers) of foreign workers to their home countries, contributions to international organizations and development aid
• The balance of the acquisition and investment income, which captures the net earned income (eg wages and salaries) and net investment income (such as interest and dividends) of residents

Summarizing the trade balance and balance of services together, you get a balance. This is defined as the difference between export and import value. It detects all flows of goods and represents the so-called net exports, which is also a part of the social product and has a direct impact on production and employment. Thus deteriorates the balance sheet, thus also the production and employment of a country deteriorates.

In the following, both the sub-balances of the current account as well as the implication of a current account surplus or deficit on the example of Germany is presented.

Balance of trade

The most industrialized countries in terms of magnitude, most of the balance of the current account is the trade balance or trade balance, in which the exports and imports of tangible goods (goods) are recorded. Exports of goods are booked in the balance of payments on the debit side (unlike in the accounts in respect of the balance of payments also called asset - or credit- side), as they result in cash inflows. Merchandise imports to book on the credit side ( in this context as liabilities or debit - side indicated ).

According to German Bundesbank in 2006 goods were exported (FOB) value of 893.6 billion euros and goods worth 731.5 billion euros (CIF) introduced in Germany. The foreign trade balance was accordingly 162.2 bn euro, reaching a peak. This includes the Bundesbank under the heading additions to the merchandise trade a correction amount of 18.6 billion euros.

Services account

In the services account all exports and imports of services are recognized. A service import is when residents offered by the foreign services avail (example:. A haircut of a German in the Netherlands or the travel German tourists abroad would therefore be from a German perspective, a service import Conversely, would be discussions of a foreign company by German, or visit foreign tourists in Germany from a German perspective, a service export).

Service transactions are statistically difficult to detect because they are not fully subject to the customs and reporting requirements, it may be that some use is made only on estimates. The imports of services is posted to the credit side, because it leads to spending, exports of services on the debit side. 2006, the German service balance was -23.1 bn euro, after he had in 2004 stood at 29.4 billion euros. The largest component of the services is the regime with a negative balance of 33.5 billion Euros (2006). This balance was 2006, however, lower than in previous years because the revenue side, additional income played a major role by the discharged in Germany in the summer half year World Cup.

Acquisition and investment income

The German Federal Bank is one of the current account as a further sub-balances the additions to the merchandise trade and the balance of the acquisition and investment income ( primary income ). Income flowing to Germany are recorded on the credit side. An acquisition and investment income flowed in 2006 to a positive balance of 23.0 billion euros from abroad to Germany.

Current transfers

In addition, or as part of the balance, the balance of current transfers ( transfer balance ) is part of the current account, and after Germany flowing transfers are recorded on the credit side. In the current transfers all those benefits are recorded, performed without the direct exchange. The transfer balance sheet records the provision and receipt of private and public transfers, such as remittances from migrant workers to their home countries, contributions to international organizations and development aid. Generally speaking, it detects the gratuitous transfer between home and abroad.

The balance of current transfers in Germany in 2006 amounted to 26.8 billion euros, so it flowed more transfers as too.

Current account balance

The current account balance is the sum of the balances of all main components ( trade in goods, services, additions to the trade in goods, primary income, current transfers ). A current account balance is greater than zero is called a current account surplus, a balance of less than zero as the current account deficit.

Current account surplus

With a current account surplus, the net foreign assets of the country concerned increases. The value of the property changes, this is the current account balance plus the balance of the balance of capital transfers. With a current account surplus of domestic savings are higher than the domestic investment. A current account surplus goes into the double entry with a corresponding increase in net capital outflows associated (increase in accounts receivable from abroad).

As more goods are produced domestically by the current account surplus because of the greater demand than in the presence of a balanced trade balance, a greater use of labor is also likely. Because the increased foreign exchange earnings from the export will not be reused completely to import the current account surplus, objected critical ( such as already by Adam Smith to the mercantilism ) that apart from the employment effect only not used, foreign exchange, on the other hand, had been taken.

Uneven is the evaluation of the associated with the surplus net capital exports. He is considered by some economists (such as Hans -Werner Sinn ) is considered a sign of a location weakness and outflow of capital at the expense of domestic investment, on the other hand, the increased receivables from abroad are also regarded by some economists as a sign of a site strength.

Current account deficit

A country with a negative contribution imports more than it exports, which is equivalent to a decline in assets (ie a fall in net foreign assets ). It is seen as problematic, a negative trade balance especially if at the same time ( as in the U.S. ) there is a budget deficit; one speaks in such a case of a double deficit or from the English translated literally twin deficits (twin deficit ). The change in assets is in this case out of the current account balance from which the exports have been a part of balance, and the balance of capital transfers together. Conversely, a negative external contribution but also be interpreted as a positive inflow of foreign capital, which is used may be profitable investments.

A current account deficit or a surplus consumption is also when domestic total consumption (absorption ) is greater than its own value (gross domestic product) is. This may be the case, for example through public transfers and capital inflows.

Use and importance of the current account balance

Overall, the items of the current account in Germany in 2006 add up to a current account balance of 116.6 bn euro. This revenue surplus can speak will fund other cash outflows that are recognized in other sub-accounts of the balance of payments. The capital account recorded flows from Germany but on balance 0.2 billion euros from abroad. The balance of unclassifiable items was EUR 30.0 billion euro. The foreign reserves of the Bundesbank at transaction values ​​decreased by 2.9 billion euros, but that goes with 2.9 bn euro in the balance of payments, since the sale of foreign reserves to income from abroad leads. Thus, these three positions increased again in addition to the current account surplus, the excess of payments received from abroad to a total of 146.3 bn euro. This -146.3 bn euro in the financial account (including changes in reserves) was financed payment disposals net. Capital was thus created on balance abroad in one form or another. Overall, the balance of payments of a currency area resembles like always.

For such an outflow of capital, there are two possibilities. On one hand, one could assume that Germany is a poor business location and it is therefore not worthwhile to continue investing here. However, it may also be that there are other sites that offer a higher return on capital employed (emerging markets ). Although, these are for the time being to runoff capital. The related interest payments may be used to finance the future domestic consumption. This can, for example, also be expressed that these foreign capital income be used to shorten the working life or to finance consumption in old age.

Current account surpluses are offset by current account deficits of other countries whose debt vis therefore increases. Rising external imbalances are discussed as possible causes of the financial crisis critical from 2007. Many see Keynesian economists in the current account differences existing in the euro area a core cause of the euro crisis, such as Heiner Flassbeck, Paul Krugman or Joseph Stiglitz.

External balance

Using equation of the social product for an open economy:

The external balance does not match the current account balance. The current account balance is derived from the external balance plus the balance of the balance of current transfers.

To 1: goods and services that have been provided in the course of an economic cycle

To 2: specifies where the provided goods and services were

Exceed exports, imports, it is called a positive contribution. In the opposite case it is called a negative contribution. Are exports equal imports, then it is a balanced net exports. A balanced trade balance is a common definition of external balance in the context of the magical square.

Example

The following example will show the evolution of the current account of Sweden in the years 1995-2008.

In the presentation of the current account of the example country Sweden at the right edge is to recognize that since 1995 up to the year 2005, the current account steadily rising. If a current account behaves, that the balance of each year is greater than zero, one speaks of a so-called current account surplus. This means that the export of goods and services in the years 1995-2005 has exceeded the import. Furthermore, it should be mentioned that a positive balance as it exists here, inevitably means an increase in receivables from abroad. Which means that the revenues from the trade of goods and services exceed the related deposits. Such a long-lasting excess indicates a deficit abroad.

Determinants of the current account

The current account and thus the current account balance, ie the sum of the main components of the current account is determined in large part by the balance of goods and services imports and exports. The amount of exports and imports of a country turn in doing so are closely related to the level of savings and investment in an economy. This relationship can be mathematically explained as follows:

Mathematical derivation

The domestic product ( Y) of an economy is initially the sum of consumption (C ), investment (I), government spending (G) and the balance of exports ( EX) and imports ( IM):

The balance of exports and imports can also be represented as net exports (NX):

It follows:

By transform is obtained: where national saving is (S )

Is obtained:

This yields the relation between saving and investment on the one hand and net exports and current account balance to another page:

This indicates that the balance of savings and investment equal to the current account balance.

Model of a small economy

Assumptions

In order to investigate the effects of changes in aggregate savings and investment on the current account is assumed in the following analysis of a small open economy with perfect capital mobility. This means that this economy because of their size has only a very small impact on the world economy and thus on the world interest rate that the residents have free access to the world financial and can absorb unlimited amounts and lend. The rule is: r = r *

R = domestic interest rate

R * = world interest rate

It follows that the level of savings and investment are determined by the world interest rate. At a high world interest rate, therefore, the savings will be higher than the investment. At low world interest rate, in turn, the investment will be higher than the savings.

Point 1 shows that at a low interest rate world, the investment in an economy are higher than the savings evolves and a current account deficit.

Point 2 shows the world interest rate, where the investment of an economy correspond to the savings and the current account is balanced.

Point 3 shows that at a high world interest rate, the investment in an economy are lower than the savings evolves and a current account surplus.

The effect of different determinants

World market interest rate

As already described, the reduction of the global rate leads to an increase in the investment. This means that the consumer in an economy consume more resources. If this consumption is increasing over the available resources from domestic production, this can only be met through imports from the rest of the world. Due to the increased consumption of resources will be available only a minor part of domestic production for export are available, the export volume decreases with increasing import volumes, which leads to an excess of imports over exports, and thus the current account tends to lead to a deficit. Conversely, it can be said that an increase in the world interest rate reduces resource consumption, export volumes rise, the decline in imports and the current account tends to show a surplus.

S ↓ ↓ I ↑ EX IN or S ↑ ↑ ↑ I ↓ EX IM ↓

Fiscal policy

This refers to here as changes in taxes. Since the consumption (C ) from disposable income (YT ) is dependent, increases by a reduction in the tax burden of the disposable income of households and thus consumption increases and in part also the savings. But above all, be reduced by the decreased tax revenues the government savings ( TG) and thus the national economy overall saving. It follows, as already mentioned in the above example that the resource consumption increases over the available production and thus the imports exceed exports. The current account balance would thus tend to have a deficit.

(Y- T -C ↑ ↓ ) (T ↓ -G) I = NX ↓

Terms of Trade

The ratio of export prices to import prices terms of trade also has a strong influence on the current account. For example, a relative improvement of export prices to import prices leads to an increase in real income of an economy. The economy can realize more imports for the same amount of exports due to the improved terms of trade.

Trade policy

If a country's government decides to restrict the import of foreign goods, this initially leads to a reduction in imports and thus to an increase in net exports (EX -IM ↓ ↑ = NX ). Since these protectionist policies but has no effect on savings or investment, and thus on the current account balance (SI = NX), net exports must again reach the same level as before. This can be explained by the increase in the real exchange rates and the associated relative increase in the price of domestic products. Due to the relative price changes in domestic compared to foreign products, domestic exports will decline and thus caused by the protectionist policy increase in net exports compensate (EX -IM = NX ↓ ↓). Ultimately, the economy is import not only less but also export less. The economic net export will adopt the same level as before due to the increase in the real exchange rate, the trade volume (EX IM) ↓ decreases, which ultimately results in a reduction of the welfare gains. The hoped by the protectionist policy improvement in the current account, since both the saving and the investment will not be affected not reached.

Transfer to a large economy

In contrast to the small economy, the interest rate in the large economy is not determined by the world interest rate. Rather, it can be influenced by policy measures, such as fiscal policy, the interest rate. Nevertheless, the model of the small economy can be transferred to a large economy, as is also effective here, the interest rate on both the investment demand as well as the saving of the economy. This suggests that policy measures that affect the interest rate, thus also affect the investment or savings of an economy and ultimately affect the power balance in their balance.