1. What is current account balance? What is the link between current account balance national savings and Investments? Are current account deficits always harmful? Analyze India’s current account data over the last 5 years? A. What is current account balance? Definition: The current account balance is the difference between a country's savings and its investment. "[If the current account balance is] positive, it measures the portion of a country's saving invested abroad; if negative, the portion of domestic investment financed by foreigners' savings." The current account balance is defined by the sum of the value of imports of goods and services plus net returns on investments abroad, minus the value of exports of goods and services, where all these elements are measured in the domestic currency. B. What is the link between current account balance national savings and Investments? Firstly, it is worth remembering that in a closed economy, we assume that saving = investment. (S=I). For a firm to invest, it needs savings to be able to finance the investment. Economists have noted that if domestic saving are lower than domestic investment, we will see a current account deficit. 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
1. What is current account balance? What is the link between
currentaccountbalancenational
savingsandInvestments?Arecurrentaccount deficits always harmful?
Analyze Indias current accountdata over the last 5 years?A. What is
current account balance?Definition: The current account balance is
the difference between acountry's savings and its investment. "[f
the current account balance is!"ositive# it measures the "ortion of
a country's saving invested abroad$ ifnegative# the "ortion of
domestic investment financed by foreigners'savings."The current
account balance is defined by the sum of the value of im"ortsof
goods and services "lus net returns on investments abroad# minus
thevalueof e%"orts of goods andservices# whereall theseelements
aremeasured in the domestic currency.&. What
isthelin'betweencurrent account balancenational
savingsandnvestments?(irstly# it is worth remembering that in a
closed economy# we assume thatsaving ) investment. *+),. (or a firm
to invest# it needs savings to beable to finance the
investment.-conomists have noted that if domestic saving are lower
than domesticinvestment# we will see a current account deficit.
Why?&efore# we loo' at a more mathematical a""roach# it is
hel"ful to thin' ofa country which e%"erienced a ra"id fall in
savings# but investment levelsstay the same. A fall in savings
means "eo"le are s"ending more *higherconsum"tion,therefore#
thiswouldtendtosuc'inim"ortsaswebuygoods and services from
abroad.&ut# also# if domestic savings fall . how will the
domestic investment befinanced?Theinvestment must
befinancedfromca"ital inflows fromabroad.A country li'e /a"an has
had a glut of saving over investment. This savingtended togoabroad
loo'ing for more "rofitable investment. Therefore#/a"an has had a
deficit on ca"ital flows# and a corres"onding sur"lus onthe current
account.The0+bycontrast hasoftenhadalevel of investment greater
thansavings. This has been financed by ca"ital inflows and a
current accountdeficit.+avings nvestment and 1urrent Account 234
*2ross 3ational 4roduct, ) 2ross Domestic 4roduct *2D4 5r 6, 7
3etincome from abroad *8, 234 ) 6783et income from abroad can be
negative if foreigners own more assets inthe 09# .income fromthese
assets will be sent abroad leading tonegative net income from
abroad.-:uilibrium in 3ational ncome .2D4 *6, involves this formula
2D4 *6, ) 17727 *;
