“ Do  Current  Account Deficits Matter?” By Atish Ghosh and Uma Ramakrishnan
Order of inquiry <ul><li>What is the current account balance and how is it determined? </li></ul><ul><li>What is a current...
What exactly is the current account balance and how is it determined? <ul><li>The current account balance is part of the B...
Measuring the Current Account <ul><li>According to Ghosh and Ramakrishnan the current account can actually be measured thr...
What is a current account deficit? <ul><li>A current account deficit occurs when the current account balance is negative w...
The U.S Current Account Balance for 2002 (U.S. $ Billions)   Source: Data from the Bureau of Economic Analysis, U.S. Depar...
Does it matter how the current account deficit is measured or defined? <ul><li>Yes! A truly accurate measure of the curren...
What causes a current account deficit? <ul><li>Real Causes </li></ul><ul><li>High consumption </li></ul><ul><li>Low Saving...
Trends… <ul><li>Capital-poor developing countries often have CA deficits  </li></ul><ul><li>Private capital flows from dev...
Do current account deficits matter? <ul><li>G & R say, “It all depends.” </li></ul><ul><li>If the extent of external debt ...
Do current account deficits matter? <ul><li>CA deficits also matter when nations are faced with the following: </li></ul><...
Do current account deficits matter? <ul><li>CA deficits are less likely to have a significant impact when nations are face...
Bernanke on the US Current Account Deficit 2/14/07 Source: http://money.cnn.com/2007/02/14/news/economy/bernanke_remarks/i...
Alternative view of the Current Account Deficit and the US Economy <ul><li>http://www.petersoninstitute.org/publications/p...
Alternative view continued… <ul><li>There are a few signs that the sharp and steady rise of the US current account deficit...
Conclusions <ul><li>Many people mistakenly attribute current account deficits to unfair trade practices.  </li></ul><ul><l...
Implications <ul><li>Current account deficits and globalization </li></ul><ul><li>Likelihood of future economic crisis due...
A final thought…. <ul><li>If you were the President, how would you address the issue of ballooning current account deficit...
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"Do Current Account Deficits Matter?"

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Provides an overview of the reseach of Ghosh and Ramakrishnan on current account deficits: what they are, how they are measured and whether they matter.

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  • So
  • The Asian economic crisis was the result of speculation on the Thai baht which caused foreign investors to short sell the baht which led to an extreme devaluation of the baht and the crash of the Thai stock market. Thailand had taken out short term loans from abroad to finance domestic projects many of which were for housing for which there was an over supply and a lack of demand. As businesses stopped being able to pay their loans, it looked as though the Thai gov, borrowers would default on their international loans and this led to the speculation. There was simply an oversupply of Thai baht in the hands of foreigners because Thailand had begun importing after a stint of export led growth. There was also a lack of FDI and a lack of foreign exchange reserves. There was slower growth in partner countries as China had not emerged fully and the baht was tied to the dollar which caused it to appreciate prematurely and then crash with the speculation. Had there not been a current account deficit that put the Thai baht in the hands of foreigners the Asian economic crisis could likely have been avoided.
  • "Do Current Account Deficits Matter?"

    1. 1. “ Do Current Account Deficits Matter?” By Atish Ghosh and Uma Ramakrishnan
    2. 2. Order of inquiry <ul><li>What is the current account balance and how is it determined? </li></ul><ul><li>What is a current account deficit? </li></ul><ul><li>Does it matter how it is measured or defined? </li></ul><ul><li>What causes a current account deficit? </li></ul><ul><li>Do current account deficits matter? </li></ul><ul><li>So, do current account deficits really matter? </li></ul><ul><li>Implications </li></ul>
    3. 3. What exactly is the current account balance and how is it determined? <ul><li>The current account balance is part of the Balance of Payments (BOP) </li></ul><ul><li>BOP is the record of all of a countries international transactions </li></ul><ul><li>BOP = CA (current account) + FA (financial account) and must equal zero </li></ul><ul><li>BOP is also represented by the following equation: </li></ul><ul><li>(X-IM) + Sf +rf +Tf =0 </li></ul><ul><li>(X-IM) + Tf +rf represents the Current Account and Sf represents the Financial Account </li></ul><ul><li>X=Exports , IM=Imports, Tf=intl. transfers, rf=returns on assets, Sf=inflow of foreign savings </li></ul><ul><li>The current account thus records the flows of goods, services and transfers and the current account balance reflects the net flow of goods, services and transfers including gifts. </li></ul>
    4. 4. Measuring the Current Account <ul><li>According to Ghosh and Ramakrishnan the current account can actually be measured three ways: </li></ul><ul><li>CA is “the difference between the value of exports of goods and services and the value of imports of goods and services.” </li></ul><ul><li>CA is “the difference between national (both public and private) savings and investment.” </li></ul><ul><li>CA can be viewed in terms of the timing of trade. </li></ul>
    5. 5. What is a current account deficit? <ul><li>A current account deficit occurs when the current account balance is negative which means that a country is spending more abroad then it is taking in. </li></ul>
    6. 6. The U.S Current Account Balance for 2002 (U.S. $ Billions) Source: Data from the Bureau of Economic Analysis, U.S. Department of Commerce, published online January 28, 2004. <ul><li>+Credits: Sources of Foreign Exchange </li></ul><ul><li>A: Exports of goods $681.9 </li></ul><ul><li>Trade balance </li></ul><ul><li>C: Exports of services (fees earned, transportations receipts, foreign tourism to U.S. etc.) $292.2 </li></ul><ul><li>Services balance </li></ul><ul><li>E: Income Receipts $255.5 </li></ul><ul><li>Income Balance </li></ul><ul><li>Current account balance </li></ul><ul><li>-Debits: Uses of Foreign Exchange </li></ul><ul><li>B: Imports of civilian goods $1,164.7 </li></ul><ul><li>= Deficit of $482.8 </li></ul><ul><li>D: Imports of services (fees paid out, transportation charges, U.S. tourism abroad, etc. $227.4 </li></ul><ul><li>= Surplus of $64.8 </li></ul><ul><li>F: Income payments $259.5 </li></ul><ul><li>= Deficit of $4.0 </li></ul><ul><li>G: Net unilateral transfers (gifts) $58.9 </li></ul><ul><li>= A + C + E - (B + D + F + G) = Deficit of $480.9 </li></ul>
    7. 7. Does it matter how the current account deficit is measured or defined? <ul><li>Yes! A truly accurate measure of the current account balance must include the net flow of goods, services and transfers including gifts. </li></ul><ul><li>Considering only the difference between the value of exports of goods and services and the value of imports of goods an services is representative of the trade balance only. </li></ul><ul><li>Considering the difference between national (both public and private) savings and investment is inaccurate because it can misrepresent a low level of savings and a high level of consumption for a high rate of investment. </li></ul><ul><li>Measuring/defining the CA deficit in terms of the timing of trade is faulty because timing is likely not the only reason there is a current account deficit, except in extreme cases. </li></ul>
    8. 8. What causes a current account deficit? <ul><li>Real Causes </li></ul><ul><li>High consumption </li></ul><ul><li>Low Savings </li></ul><ul><li>High investment (possibly a popular cause) </li></ul><ul><li>Competitiveness problems </li></ul><ul><li>Popular Causes </li></ul><ul><li>Unfair trade practices </li></ul><ul><li>Natural Disasters/Crisis </li></ul>
    9. 9. Trends… <ul><li>Capital-poor developing countries often have CA deficits </li></ul><ul><li>Private capital flows from developing to advanced economies leading to CA deficits in advanced economies (U.S) </li></ul><ul><li>Developing countries and emerging market economies usually run surpluses </li></ul><ul><li>https://www.cia.gov/cia/publications/factbook/rankorder/2187rank.html </li></ul>
    10. 10. Do current account deficits matter? <ul><li>G & R say, “It all depends.” </li></ul><ul><li>If the extent of external debt of a nation is manageable and borrowing will finance investment with a higher marginal product then running a CA deficit may not matter unless the CA deficit becomes unsustainable. </li></ul>
    11. 11. Do current account deficits matter? <ul><li>CA deficits also matter when nations are faced with the following: </li></ul><ul><li>An overvalued real exchange rate </li></ul><ul><li>Inadequate foreign exchange reserves </li></ul><ul><li>Fast domestic credit growth </li></ul><ul><li>Unfavorable terms of trade shocks </li></ul><ul><li>Low growth in partner countries </li></ul><ul><li>Higher interest rates in industrial countries </li></ul><ul><li>Extent of liability dollarization and maturity mismatches </li></ul><ul><li>Relative stability of FDI vs. portfolio and short-term investment flows </li></ul><ul><li>Weak financial sectors (that lead states to borrow from abroad and loan domestically) </li></ul><ul><li>Case in point: Thailand in 1997 and the resulting economic crisis. </li></ul>
    12. 12. Do current account deficits matter? <ul><li>CA deficits are less likely to have a significant impact when nations are faced with: </li></ul><ul><li>A flexible exchange rate regime </li></ul><ul><li>Higher degree of openness </li></ul><ul><li>Export diversification </li></ul><ul><li>Financial sector development </li></ul><ul><li>Coherent fiscal and monetary policies </li></ul><ul><li>Case in point: The United States? </li></ul>
    13. 13. Bernanke on the US Current Account Deficit 2/14/07 Source: http://money.cnn.com/2007/02/14/news/economy/bernanke_remarks/index.htm?postversion=2007021412 <ul><li>On balance, import growth slowed in 2006, to 3 percent. Economic growth abroad should support further steady growth in U.S. exports this year. Despite the improvements in trade performance, the U.S. current account deficit remains large, averaging about 6-1/2 percent of nominal GDP during the first three quarters of 2006 (the latest available data). </li></ul>
    14. 14. Alternative view of the Current Account Deficit and the US Economy <ul><li>http://www.petersoninstitute.org/publications/papers/paper.cfm?ResearchID=705 </li></ul><ul><li>by C. Fred Bergsten, Peterson Institute Testimony before the Budget Committee of the United States Senate February 1, 2007 </li></ul><ul><li>  The US current account deficit reached $850–875 billion in 2006. It has exceeded annual rates of $900 billion in a couple of recent quarters, including the latest for which full data are available (the third quarter of 2006). It now accounts for about 7 percent of GDP, more than double the previous modern record of 3.4 percent in the middle 1980s (as a result of which the dollar dropped by 50 percent against the other major currencies over the three-year period 1985–87). </li></ul><ul><li>Our external deficit has risen by an average of $100 billion annually over the past four years. It has climbed by an annual average of $80 billion for the past nine years. The trajectory, as well as the level of the imbalances, is clearly unsustainable. </li></ul>
    15. 15. Alternative view continued… <ul><li>There are a few signs that the sharp and steady rise of the US current account deficit may be leveling off. Excluding the impact of much higher prices for oil imports over the past year, the aggregate deficit is largely unchanged. Our trade imbalance with Europe has declined modestly, due to a pickup in European growth and the lagged effects of the substantial decline of the dollar against the euro in 2002–04. Our exports have risen about twice as fast as our imports over the past couple of months for the first time since the late 1980s, after the sharp dollar fall of the previous three years. (That currency adjustment, combined with the recession of 1990–91, virtually eliminated our external deficits in the early 1990s.) </li></ul><ul><li>The Problem </li></ul><ul><li>The huge and growing international trade and current account imbalances, centered on the US external deficits and net debtor position, represent the single greatest threat to the continued prosperity and stability of the United States and world economies. They could at any time trigger a large and rapid decline in the exchange rate of the dollar that would initiate sharp increases in US inflation and interest rates, bringing on stagflation at a minimum and quite possibly a deep recession. </li></ul><ul><li>Even in the absence of such a crisis, continued failure to address the imbalances constructively will inevitably lead to a costly and perhaps wrenching adjustment of the US and world economies. They could also lead to a disruption of US trade policy, threatening the openness of the global trading system. </li></ul><ul><li>The only effective US policy response to the problem, as its critical contribution to the needed global solution, 1 is a conversion of our present (and especially prospective) budget deficits into modest surpluses à la 1998–2001. The possibility of a sharp dollar fall is in fact the greatest short-term risk now emanating from our budget deficits and provides the most compelling reason for urgent action on them. </li></ul>
    16. 16. Conclusions <ul><li>Many people mistakenly attribute current account deficits to unfair trade practices. </li></ul><ul><li>Current account deficits have various causes including: a low level of savings, high levels of consumption, competitiveness problems and high levels of investment. </li></ul><ul><li>Current account deficits cannot be reversed through reverting to protectionism. </li></ul><ul><li>A CA deficit can significantly effect the economic success or failure of a country depending on the other economic factors at play. </li></ul><ul><li>Despite the fact that not everyone agrees, Current Account Deficits do really matter! </li></ul>
    17. 17. Implications <ul><li>Current account deficits and globalization </li></ul><ul><li>Likelihood of future economic crisis due to current account deficits and globalization </li></ul>
    18. 18. A final thought…. <ul><li>If you were the President, how would you address the issue of ballooning current account deficits and still be electable? </li></ul>
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