The document summarizes key concepts relating to current account balances and international investment positions. It defines current account balances and their components, and explains that a current account surplus means exports exceed imports while a deficit means the opposite. It then discusses factors that can cause a current account deficit, whether deficits are good or bad, and policies to reduce deficits. The document also defines international investment positions and their importance. It concludes by summarizing a case study on the deterioration of the US current account balance and its transition to becoming a net debtor nation.

1. Principles of International Economics
Prof. Birgit Eitel
Georg‐Simon‐Ohm Hochschule of Applied Sciences
Ahmad Abo-Obid
6th June 2011
SS 2011

2. 1- Current account
Definition
Components
Cases
Factors Cause Deficit
Deficit is Good or Bad
Policies Reduce Deficit
Concept of Deterioration
2- International investment position
Definition
Important
3- Case Study 10-4
Current Account Balance &
International Investment Position 2

3.  one of primary components of the balance of payments.
 the sum of the
balance of trade (exports minus imports of goods and services)
net factor income (such as interest and dividends)
net transfer payments (such as foreign aid).
 one of major measures of the nature of a country's foreign trade.
Current Account Balance &
International Investment Position 3

4. Current account surplus and deficit
 Current account surplus means exports of goods and services, investment
income and transfers exceed imports and outflows.
 Current account deficit means imports of goods and services, and outflows
are greater than exports and inflows.
Current Account Balance &
International Investment Position 4

5. Factors which cause a current account Deficit in the
balance of Payments
 Fixed Exchange Rate
If the currency is overvalued, imports will be cheaper and therefore there will be a
higher Q of imports.
 Economic Growth
If there is an increase in AD and National Income increases, people will have more
disposable income to consume goods. If domestic producers can not meet the
domestic AD, consumers will have to imports goods from abroad.
 Decline in Competitiveness.
If exports become less competitive, due to lower productivity then demand for
exports fall. This is likely to explain a long term deficit.
E.g. the UK has lost comparative advantage for the manufacture of many
goods to Asian countries like China.
Current Account Balance &
International Investment Position 5

6.  Higher inflation
This makes exports less competitive and imports more competitive.
 Recession in other countries.
If the UK’s main trading partners experience negative economic growth then they
will buy less of its exports, worsening the current account.
 Borrowing money
If countries are borrowing money to invest.
Current Account Balance &
International Investment Position 6

7. Current account deficit is good or bad?
 It depends on whether the borrowed funds are used to pay for consumption
or investment.
 a deficit is not necessarily a bad thing for an economy, especially for an
economy in the developing stages or under reform: an economy sometimes
has to spend money to make money.
 However, a problematic deficit can result if a government has not planned
out a sound economic policy and used its debts for consumption purposes,
not future growth.
Current Account Balance &
International Investment Position 7

8. Policies to reduce a balance of Payments Deficit
 Devaluation.
This involves lowering the value of the currency against others.
 Deflation
If government reduces AD by raising interest rates or increasing taxes then people
will have less money to spend so they reduce consumption of imports.
 Supply Side Policies
These can improve the competitiveness of the economy and exporters, but this will
take time to have effect
 Protectionism
Increased tariffs will reduce imports and improve the current account.
Current Account Balance &
International Investment Position 8

9. Deterioration in the current account
 means that the value of exports has increased at a slower rate than the
value of imports. Therefore there could have been an increase in the deficit
or the surplus could have changed into a deficit.
Current Account Balance &
International Investment Position 9

10.  Measures the total amount and the distribution of a nation’s assets abroad
and foreign assets in the nation at the end of year.
 Summarizes one nation’s overall quantity of assets and liabilities against
the rest of the world.
 Shows whether the nation is a net debtor or a net creditor.
 Indicates sensitive items, such as short term debt held by foreigners which
could be liquidated quickly, straining finances.
Current Account Balance &
International Investment Position 10

11. 3- Case Study 10-4: The Deterioration of U.S Current Account Balance &
Net International Investment Position
• From the table, we see that the U.S
net international position deteriorated
sharply from +$366 billion at the end
of 1980 to -$223 billion in 1990.
• The amount of U.S. assets abroad
increases but Foreign assets in the
U.S increased at double.
• Important points from Table 10.5. :
 First, U.S become a net debtor nation.
 Second, U.S assets abroad are
smaller than foreign assets in U.S .
Table 10.5. The U.S IIP, Selected Years: 1980-2000
Current Account Balance &
International Investment Position 11

12. 3- Case Study 10-4: The Deterioration of U.S Current Account Balance &
Net International Investment Position
Figure 10.2:
 shows the sharp increase in the U.S.
current account deficit after 1997 and
its net international investment
position after 1999.
 Shows that the U.S. net investment
position become negative (making the
U.S a net debtor nation) in 1986 and
increased so rapidly after 1999 as to
make the U.S the world’s most
indebted nation in 2006.
 The U.S. had small CA surpluses only
in 1980, 1981, and 1991, and CA
deficits in all other years, and CA
deficits increased rapidly after1997.
 The U.S. NIIP was positive until 1986
and negative thereafter, and it
Figure 10.2 U.S CAB & NIIP, 1980-2006(billion dollars) increased sharply after 1999.
Current Account Balance &
International Investment Position 12

13.  US consumer spending has been rising :
So the US has been increasing the value of imports bought into the economy.
 Decline in competitiveness :
US manufactured goods have been losing comparative advantage to Asian economies.
 Dollar Relatively High compared to current account deficit:
Dollar has not devalued as much as you would expect for an economy with a large
current account deficit. The US has remained an attractive location for Capital
investment.
Therefore the inflow of capital has financed the current account deficit and has
encouraged America to keep buying imports and the low interest rates from the
inflow of capital have encouraged consumer borrowing and spending.
Current Account Balance &
International Investment Position 13

14. Thank you for listening
Current Account Balance &
International Investment Position 14

15.  [1] Herman E. Daly, Joshua Farley, Ecological Economics: Principles And Applications,
Island Press, 2003
 [2] Carbaugh,Robert,“The Balance of Payments“, International Economics, 9th Edition,
South-Western, 2004, Chap. 11
 [3]Salvatore, Dominick, “Balance of Payments”, Introduction to International Economics,
2th Edition, 2005. Chap. 10
 [4] Heakal, Reem, “Understanding The Current Account In The Balance Of
Payments”,[Article published online: http://www.investopedia.com/articles/03/061803.asp].
 [5] Heakal, Reem, “Current Account Deficits: Government Investment Or Irresponsibility? ”
[Article published online: http://www.investopedia.com/articles/04/012804.asp].
 [6] Ghosh, Atish , „Do Current Account Deficits Matter? “Article published December 2006,
Volume 43, Number 4 online:
http://www.imf.org/external/pubs/ft/fandd/2006/12/basics.htm].
 [7]Pettinger, Tejvan, „Factors which cause a current account Deficit in the balance of
Payments” [Article published online:
http://www.economicshelp.org/macroeconomics/bop/cause-of-deficit.html].
 [8]Pettinger, Tejvan, „ Policies to reduce a balance of Payments Deficit“[Article published
online: http://www.economicshelp.org/macroeconomics/bop/policies-to-reduce-deficit.html]
 [9]Pettinger, Tejvan, “What Causes the US Current Account Deficit.” “[Article published
online: http://econ.economicshelp.org/2007/03/what-causes-us-current-account-
deficit.html]
Current Account Balance &
International Investment Position 15