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 *;
