Beruflich Dokumente
Kultur Dokumente
The Current account (https://www.economicshelp.org/dictionary/c/current-account-bop.html) on the Balance of payments measures the balance
of trade in goods and services.
The current account is essentially exports – imports (+net international investment balance)
It is also worth noting that if we have a current account de cit, in a oating exchange rate this must be balanced by a surplus on the
nancial/capital account.
(https://www.economicshelp.org/wp-content/uploads/2017/09/current-account-balance-of-payments.png)
https://www.economicshelp.org/blog/6411/economics/current-account-savings-investment/ 1/5
5/1/2018 Current Account = Savings – Investment | Economics Help
Why do economists say that the current account also equals saving – investment?
Firstly, it is worth remembering that in a closed economy, we assume that saving = investment. (S=I). For a rm to invest, it needs savings to be
able to nance the investment. See: Saving and investment (https://www.economicshelp.org/blog/196/economics/saving-investment/)
Economists have noted that if domestic saving are lower than domestic investment, we will see a current account de cit. Why?
Before we look at a more mathematical approach, it is helpful to think of a country which experienced a rapid fall in savings, but investment
levels stay the same. A fall in savings means people are spending more (higher consumption) therefore, this would tend to suck in imports as we
buy goods and services from abroad.
But, also, if domestic savings fall – how will the domestic investment be nanced? The investment must be nanced by capital in ows from
abroad.
A country like Japan has had a glut of saving over investment. This saving has tended to go abroad looking for more pro table investment.
Therefore, Japan has had a de cit on capital ows, and a corresponding surplus on the current account.
The US, by contrast, has often had a level of investment greater than savings. This has been nanced by capital in ows and a current account
de cit.
Net income from abroad can be negative if foreigners own more assets in the UK, – income from these assets will be sent abroad leading to
negative net income from abroad.
(C= consumption, I= Investment, G=government spending) (X-M) = net demand from abroad.)
The Current account (CA) is also conventionally de ned as (X-M) (value of exports – value of imports) + Net income from abroad. (R)
CA = (X-M) + (R)
Therefore,
CA = GNP – (C+I+G)
As a result, the current account is also equal to the di erence between savings and investment
CA = S-I.
From an accounting perspective, it doesn’t make any di erence whether we see the current account as
Suppose domestic saving is insu cient to nance Domestic investment. How will the domestic investment be nanced?
It will be nanced by investment from abroad. These capital ows are a credit on the capital account and will be matched by a de cit on the
current account.
Conversely, if a country has excess savings, these savings will go abroad to nance investment in other countries. This will give a negative
balance on the capital account, and enable a current account surplus.
https://www.economicshelp.org/blog/6411/economics/current-account-savings-investment/ 2/5
5/1/2018 Current Account = Savings – Investment | Economics Help
Related
This entry was posted in economics (https://www.economicshelp.org/blog/category/economics/) and tagged current account (https://www.economicshelp.org/blog/tag/current-
account/). Bookmark the permalink (https://www.economicshelp.org/blog/6411/economics/current-account-savings-investment/).
← State Intervention and Market Failure Factors a ecting Current Account De cit →
de cit/)
Suppose domestic saving is insu cient to nance Domestic investment. How will the domestic investment be nanced?
It will be nanced by investment from abroad. These capital ows are a credit on the capital account and will be matched by a de cit on the
current account.
I don’t understand,
“””””These capital ows are a credit on the capital account and will be matched by a de cit on the current account.”””””
Only I will take credit for my investment. why will be matched by de cit on the current account??????
Reply (https://www.economicshelp.org/blog/6411/economics/current-account-savings-investment/?replytocom=66444#respond)
Reply (https://www.economicshelp.org/blog/6411/economics/current-account-savings-investment/?replytocom=106624#respond)
https://www.economicshelp.org/blog/6411/economics/current-account-savings-investment/ 3/5
5/1/2018 Current Account = Savings – Investment | Economics Help
what is the impact on savings, investment, and consumption if a country is forced to have a balanced current account (X-M)=0?
Reply (https://www.economicshelp.org/blog/6411/economics/current-account-savings-investment/?replytocom=347565#respond)
Leave a Reply
Your email address will not be published. Required elds are marked *
Comment
Name *
Email *
Website
Post Comment
Revision Guides
(/shop)
(https://www.economicshelp.org/shop/revision-guide/)
Cracking Economics
https://www.economicshelp.org/blog/6411/economics/current-account-savings-investment/ 4/5
5/1/2018 Current Account = Savings – Investment | Economics Help
(https://www.economicshelp.org/shop/cracking-economics/)
Recent Posts
Tags
austerity
a-level (https://www.economicshelp.org/blog/tag/a-level/) amazon (https://www.economicshelp.org/blog/tag/amazon/)
Popular posts
https://www.economicshelp.org/blog/6411/economics/current-account-savings-investment/ 5/5