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Current Account

How do we know when a current account deficit is bad?

December 10, 2022December 11, 2022MarkLeave a comment

A current account deficit (CAD) allows residents to consume more products that it produces. However the country needs to finance the deficit by attracting investment into the country or by borrowing. This will involve an outlow of money in the future in the form of investment income. An increase in a CAD may also reduce AD, which may slow down economic growth and may cause unemployment.

A CAD could be indicative of a lack of competitiveness but it could also mean an excess of investment over savings which could mean a highly productive, growing economy. Although there is a deficit an important question is what the deficit is made up of? If a country is importing a significant amount of capital goods then these can add value to the economy by creating jobs and growth. For example if Air New Zealand buy planes from Airbus these are part of the service that they offer which employs people and generates income. But if a CAD reflects low savings rather than investment, it could be caused by an irresponsible expansionary fiscal/monetary policy like we have seen in New Zealand post-covid.

New Zealand’s annual current account deficit was $27.8 billion for the year ended in the June 2022 quarter, equivalent to 7.7 percent of GDP. The annual current account deficit rose by $16.3 billion during the year, driven by increases in the goods and services deficits. Sea transport costs (which is a services import cost) rose by $2.2 billion during the year, and was a driver behind a $5.0 billion deterioration in New Zealand’s services balance. However the record-breaking deficit shows we’ve been living beyond our means, becoming more dependent on foreign capital in the process. However CAD reflect underlying economic trends, which may be desirable or undesirable for a country at a particular point in time.

Causes of CAD

  1. Overvalued exchange rate – If the currency is overvalued, imports will be cheaper, and therefore there will be a higher quantity of imports. Exports will become uncompetitive, and therefore there will be a fall in the quantity of exports.
  2. Economic growth – If there is an increase in national income, people will tend to have more disposable income to consume goods. If domestic producers cannot meet the domestic demand, consumers will have to import goods from abroad. In New Zealand there is a high tendency to import manufactured goods as we don’t have a comparative advantage.
  3. Drop in demand from trading partners – If there is a downturn in country A that normally buys another country B’s exports this will mean a loss of export revenue for country B. A current account deficit that results from the economic cycle is referred to as a cyclical deficit. Usually short-term and self-correcting
  4. Growing domestic economy – when demand increases in the domestic economy it may mean that companies now have to import more capital goods and raw materials from overseas. As well as imports increasing, producers may switch their sales to the domestic market and not overseas (exports). However in the long-term firms output might increase so that they can sell both at home and abroad.
  5. Higher inflation – if New Zealand’s inflation rises faster than our main competitors then it will make New Zealand exports less competitive and imports more competitive. This will lead to deterioration in the current account. However, inflation may also lead to a depreciation in the currency to offset this decline in competitiveness. 
  6. Structural problems – a current account deficit that is persistent is concerning as it indicates that domestic firms are not internationally competitive and the country may have to borrow from overseas to fund the current account deficit. As well as an overvalued exchange rate (see above) the country might have low labour and capital productivity so finds it hard to compete internationally.

Sign up to elearneconomics for comprehensive key notes with coloured illustrations, flash cards, written answers and multiple-choice tests on the current account that provides for users with different learning styles working at their own pace (anywhere at any time).

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Debt, Fiscal Policy, Interest Rates, TradeCurrent Account, Monetary Policy

Current Account Imbalances – What do they mean?

October 3, 2022October 3, 2022MarkLeave a comment

Today I have been covering this topic at a Cambridge AS Level revision course. In 2008 the world economy went through what is known as the global financial crisis (GFC). A lot of commentators had forecasted the GFC but there was a common assumption that the crisis would be caused by persistent current account imbalances. However it was poor regulation of financial markets and excessive risk-taking that were the root cause of the crisis and not current account imbalances. This becomes apparent when you look at how deficit and surplus countries were impacted by the GFC:

Eurozone – current account deficit countries went through a major recession
Australia had a consistent current account deficit – averaging 4% of GDP – but went through the crisis years without experiencing a recession. Australia has to thank China’s insatiable demand for natural resources.
Switzerland had significant current account surpluses which has averaged 7.8% since 1981 – peaked 14.9% in 2010 – but the GFC had a major impact on its economy. This was mainly because it hit the country’s two biggest banks.

What do current account imbalances mean?

Current accounts are endogenous in nature, driven by numerous factors. However many commentators tend to take a very simplistic view of what causes a deficit. A good example of this is Donald Trump’s accusation of Germany’s current account surplus being funded by America’s deficit and the assumption that reducing German’s surplus will improve America’s deficit. This rationale would mean that the US deficit is exogenous and the German surplus is endogenous.

German SurplusFurthermore some have challenged the view that Germany’s surplus reflects the country’s superior productivity and stagnant wage growth. Although German does have high earnings from overseas it is what Germany does with these surpluses that is the issue – rather than spend on imports, which would reduce the current account deficit, it saves a large part of these surpluses.

The definition of the current account balance found in most textbooks is the difference between export earnings and import payments of the 4 accounts – Goods, Services, Primary Income and Secondary Income. This tends us to focus on the comparative advantage that a country may have and it dependence on certain imports. According to Paul Krugman competitiveness encompasses not only prices of goods and services, but also their quality, production costs, and how they are delivered in the market place. Furthermore a firms’ business strategies and the labour market impact greatly on price competitiveness.

But if you just focus on prices it is difficult to comprehend why Switzerland retains a large current account surplus even though it has a strong Swiss Franc – a strong currency makes exports more expensive and imports cheaper. Additionally the US has had a current account deficit since 1984 even with the fluctuating US dollar – US deficit today = $116.8 bn but the currency is not seen as overvalued. Competitiveness is more a symptom than a cause of what is happening in the economy so should not be seen as what drive current account imbalances.

A better explanation

The definition that reflects more closely the primary concern of current account deficits is a country’s saving or borrowing from the rest of the world. Excessive borrowing from overseas will continue as long as deficits keep persist until the country is unable to repay its debts.

However if the make-up of the imports is generally capital goods then they add value to the economy as it will improve the competitiveness of the country’s products. Therefore if the rate of return on imports exceed the cost of borrowing to buy them it makes sense to borrow more in the long-run. Australia have experienced this situation and has little difficulty in servicing its debt. On the contrary if a country borrows to to support spending the implication is that consumers are borrowing from different trading banks. The risks are more prevalent if the trading banks borrow from overseas and have to default to foreign lenders if borrowers become less likely to pay back their debt.

Governments are much more likely to become highly indebted as unlike consumers / businesses countries cannot be closed down or forced to sell its assets. Furthermore they may political leverage to enable them to borrow more. Foreign lenders may stop lending to a country with large external debts making it impossible for that country to finance it’s ongoing deficit and consequently lead to a crisis like that in the eurozone. There are three important observations:

  1. It usually takes too long for questions to arise about whether countries that borrow excessively are competitive.
  2. Whether motivated by carelessness or expectation of a bailout if things go wrong, imprudent lending is always the root cause of persistent high deficits that finance private or public spending in excess of earnings.
  3. Large and persistent deficits create vulnerability as borrowers start to become dependent on access to funds.

Are surpluses bad?

It is generally regarded that surpluses are harmless but if households, firm, or governments spend less than they earn the surpluses must be invested abroad. However investments abroad can be very risky especially in volatile countries so prudent investment is essential.

For a lot of countries the purpose of exports is to generate revenue so that they can buy imports of goods which they may not produce – or could produce but relatively less efficient. In China a surplus does keep the export sector industries employed but suggests there is a strong presence for saving or weak domestic demand. More balanced trade would increase the level of imported goods into a country and increase real incomes as the value of its currency rises. This will allow for more inflows of foreign capital from abroad stimulating growth in the domestic economy. It would help a sluggish world economy if surplus countries, like China and Germany, were to spend more on imports.

Final thought

All current account imbalances are note created equal. In the 19th century the US had large persistent deficits in order to fund the growth and development of the country – inter state highways, national parks, hydro dams etc. Therefore these imbalances were creating value for the economy and highly productive. By contrast Greece ran large deficits to assist private consumption which doesn’t add any productive potential to the economy or value creation. Furthermore it left lenders exposed to bad debts who had to be bailed out.

Source: The Deficit Tango – Charles Wyplosz – Project Syndicate

For more on the Current Account view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

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TradeCurrent Account, Germany, USA

AS Economics Revision – Balance of Payments

July 27, 2022MarkLeave a comment

Below are some notes and a mindmap on the Balance of Payments with a New Zealand bias.

Balance of Payments consists of 3 accounts – Current Account, Capital Account and Financial Account:

1. Current Account – this consist of 4 accounts:

  • Balance of trade in Goods  – also know as visibles. E.G. Manufactured goods, Semi-finished goods, energy products, raw material, consumer goods and capital goods. The difference between visible exports (+) and  imports (-) is sometimes known as the ‘Balance of Trade’.
  • Balance of trade in Services – Invisibles. E.G. Tourism, Banking, Shipping and Transport, Education, etc. The difference between invisible exports (+) and  imports (-) is Balance on Services.
  • Balance on Primary Income – measures two main flows of income into and out of NZ: the compensation of employees – wages and salaries and investment income – Interest Profits and Dividends coming into NZ from NZ assets owned overseas matched against the outflow of profits and other income from foreign owned assets located within NZ.
  • Balance on Secondary Income – relates to transfers of money between countries by central government and other economic agents – remittances sent back to NZ from overseas workers and overseas development aid. Also a financial commitment if your country is a member of an organisation like the EU, APEC etc.

2. Capital Account – this account is of minor consequence relative to the NZ Balance of Payments as a whole. The transactions recorded here involve transfers of ownership of fixed assets and also migrants transfers. Funds brought into NZ by new immigrants are recorded as capital account credits, whilst any funds sent by NZ residents who are emigrating to other countries are debits in the capital account.

3. Financial Account – there are 2 main components of this account:

  • Direct Investment Flows – relates to FDI – Foreign Direct Investment. E.G. if Toyota invest money in a car plant in NZ this would be an inflow of direct investment. Similarly, when Carter Holt Harvey invest money overseas this will result in an outflow of direct investment from NZ.
  • Portfolio Investment Flows – consider the sale and purchase of NZ shares and government securities. E.G. when an overseas investor buys shares on the NZ stock market, there will be an inflow of portfolio investment. When overseas investor sell shares or securities, there is an outflow.
Source: CIE A Level Economics Revision. Susan Grant

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TradeBalance of Payments, Current Account, Foreign Investment

A Level Revision – Impact of a falling currency

April 28, 2021MarkLeave a comment

Below is a mindmap showing the causes and effects of a fall in the value of a currency. Also looks at how it improves the current account. Good for revision purposes when dealing with exchange rates and trade. Also gives a structure for essay questions / long answers in CIE and NCEA respectively.

Adapted from CIE A Level Revision by Susan Grant.

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Exchange Rates, TradeCurrent Account

NZ records fifth consecutive monthly trade surplus – June 2020 $426 million.

July 24, 2020MarkLeave a comment

Teaching the ‘Trade’ topic with my NCEA Level 2 class and below is a very good graphic from the Statistics NZ site. New Zealand has recorded its fifth consecutive monthly trade surplus (June 2020) and the annual deficit for the year has fallen to its lowest in nearly 6 years – $1.2 billion. What has been noticeable since COVID-19 is that there has been buoyant demand for goods exports (particularly for food products), and weak domestic demand for imports. The surplus would have been $820m but for the one-off purchase of a naval ship – HMNZS Aotearoa. Interesting to note that exports to the US and EU are up whilst down for China, Japan and Australia. However both exports and imports are higher in monetary value ‘compared to June 2019. A lot to discuss in class from the graphic

HMNZS Aotearoa – Wikipedia

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TradeCurrent Account, New Zealand

Lockdown sees NZ current account deficit narrow

June 21, 2020MarkLeave a comment
Source: ASB Bank: Economic Note NZ Q1 Current Account Review17 June 2020

The current account deficit narrowed over the year to March 2020, to $-8.4 billion (-2.7% of GDP) – see graph from ASB. This was expected especially as the fall in tourism was offset by the solid trade in goods. Tourist spending was down 8.3% whilst transport services declined by 9.4%. Travel spending overseas by New Zealander’s (imports) was down 9.7% for travel services and 5.1% for transport. The narrowing of the deficit often coincides with a downturn in the economy as there is weaker domestic demand for foreign products and services by consumers and the business sector. Covid-19 has magnified the downturn and there is more pain to come for the domestic economy. Below are some notes on the Balance of Payments which is part of NCEA Level 2 and CIE AS/A2 courses

Balance of Payments consists of 3 accounts – Current Account, Capital Account and Financial Account:

1. Current Account – this consist of 4 accounts:

  • Trade in Goods  – also know as visibles. E.G. Manufactured goods, Semi-finished goods, energy products, raw material, consumer goods and capital goods. The difference between visible exports (+) and  imports (-) is sometimes known as the ‘Balance of Trade’.
  • Trade in Services – Invisibles. E.G. Tourism, Banking, Shipping and Transport, Education, etc. The difference between invisible exports (+) and  imports (-) is Balance on Services.
  • Net Income – measures two main flows of income into and out of NZ: the compensation of employess – wages and salaries and investment income – Interest Profits and Dividends coming into NZ from NZ assets owned overseas matched against the outflow of profits and other income from foreign owned assets located within NZ.
  • Net current transfers – relates to transfers of money between countries by central government and other economic agents. E.G. Germany is a net contributor to European Union (EU) Institutions. Other items include foreign aid, military grants and money transfers.

2. Capital Account – this account is of minor consequence relative to the NZ Balance of Payments as a whole. The transactions recorded here involve transfers of ownership of fixed assets and also migrants transfers. Funds brought into NZ by new immigrants are recorded as capital account credits, whilst any funds sent by NZ residents who are emigrating to other countries are debits in the capital account.

3. Financial Account – there are 2 main components of this account:

  • Direct Investment Flows – relates to FDI – Foreign Direct Investment. E.G. if Toyota invest money in a car plant in NZ this would be an inflow of direct investment. Similarly, when Carter Holt Harvey invest money overseas this will result in an outflow of direct investment from NZ.
  • Portfolio Investment Flows – consider the sale and purchase of NZ shares and government securities. E.G. when an overseas investor buys shares on the NZ stock market, there will be an inflow of portfolio investment. When overseas investor sell shares or securities, there is an outflow.

Balance of Payments and Current Account

In theory the BOP should always balance. The sum of the current account, capital account and financial account balances should be zero. In reality however, this is never the case as it is impossible to record accurately every single transaction that takes place. An additional item known as net errors or omissions, or balancing item, is added to the BOP to ensure that the accounts balance. You can see below that a further $2,600m is required to make the accounts balance – this is referred to as “Net errors and omissions”

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TradeBalance of Payments, Current Account, New Zealand

NZ current account deficit – Short and Long-Term causes

July 30, 2019MarkLeave a comment

New Zealand’s annual current account deficit totalled $10.6 billion in the year ended March 2019, up from $8.5 billion a year earlier. As a proportion of GDP, the current account deficit was equivalent to 3.6 percent in the year ended March 2019.

For the NZ Economy the persistent trade deficit has a number of potential causes both short and long term:

  1. High propensity to buy imported goods and services – there is a tendency for NZ consumers to prefer foreign produced output and in a consumer boom we often see an acceleration in the volume of imports coming into the country
  2. Lack of productive capacity of NZ firms – if home producers have insufficient capacity to meet demand from consumers then imports will come in to satisfy the excess demand
  3. Poor price and non-price competitiveness of NZ firms – Cost levels and NZ prices relative to international competitors can measure competitiveness, but non-price factors are also important. These include quality, design, reliability and after-sales service
  4. Declining comparative advantage in many areas – the advantages that countries have in producing certain goods and services change over time as technology alters and other countries exploit their economic resources and develop competing industries. NZ manufacturing industry has suffered over the years from low cost production in newly Industrialising countries and from other parts of Asia.
  5. An over valued exchange rate – Some economists suggest that trade problems stem from the exchange rate being at too high a level. This causes NZ export prices to be higher in foreign markets whilst imports into the NZ become relatively cheaper.
  6. The strength of the NZ$ over recent years has made life difficult for NZ exporters in overseas markets. This is because a rise in the value of NZ$ leads to a rise in the foreign price of NZ exported goods and services. When NZ prices are higher, foreign consumers are less likely to buy our products. The high exchange rate also makes imported goods cheaper inside the NZ. This leads to a rise in the volume of imports and a fall in the share of the NZ market taken up by goods and services from overseas

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TradeCurrent Account, New Zealand

IMF calls for Germany to change its trade policy

February 4, 2018MarkLeave a comment

I have blogged a few times on Germany’s current account surplus and how it distorts the global economy. The surplus is currently the world’s largest in absolute terms at US$350bn which is 8.5% of Germany’s GDP. Recently the IMF called for a radical shift in Germany’s trade policy before it provokes a protectionist backlash in the USA.

The fact that Germany is selling so much more than it is buying redirects demand from other countries around the world, reducing output and employment outside Germany at a time at which monetary policy in many countries has become ineffective. Furthermore the IMF has suggested that Germany should be investing more in public infrastructure to soak up excess savings and stimulate more demand in its own economy and therefore redirect spending. The underlying criticism is that Germany should stop trying to drive down its debt – German debt ratio has fallen from 81% of GDP to 60%.

A significant advantage that Germany has is that it is part of the euro currency. If Germany still had the Deutschmark the trade surplus would have no doubt increased the value of its currency making exports more expensive and imports cheaper. The value of the euro is dependent on the strength of other countries with the currency and the European Central Bank interest rate. Interest rates being -0.4% are a disguised way of holding down the value of the euro (exports cheaper and imports more expensive) and seen by some as bad etiquette for a currency bloc running surpluses near US$430bn – three times that of China.

The German viewpoint

  • Germany says that it requires huge savings to prepare for the oncoming aging population.
    They deemed it a fundamental error to boost spending of cut or cut taxes (expansionary fiscal policy) at this late stage of the business cycle, warning that a fiscal stimulus would destabilise Germany whilst not doing much to help the rest of Europe or the global economy.
  • The German surplus is a result of millions of decisions in Germany and abroad – German products are very high quality and reasonably priced so therefore there is more demand.
    Germany needs a safety-buffer with the increasing dependency ratio as by 2020 the ratio will double to one retiree to one worker.
  • The euro is a free floating currency and there is no manipulation of the exchange rate. Its value reflects the strength of eurozone countries.

Policies to reduce the surplus.
Germany has little control over the value of the common currency, but it has several policy tools at its disposal to reduce its surplus.

  • Increase spending in infrastructure
  • Raising the wages of workers
  • Increase domestic spending.

Source: Daily Telegraph – Germany rejects IMF cal for radical shift in trade policy – Friday 19th January 2018

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Euro, TradeCurrent Account, Germany

Germany’s current account surplus – a concern?

May 30, 2017June 2, 2017Mark1 Comment

A lot of economics textbooks focus on the damaging effect of a current account deficit but what about a current surplus? Also in the media a lot is spoken of a country’s trade deficit and the concern that it is borrowing from abroad to finance current purchases of goods and services. China’s surpluses have been a big talking point but it is Germany with a current account surplus since 2002 (introduction of the Euro) with a 2015 surplus of 8% of GDP which has taken the limelight – see graph from The Economist.

germany-surplus

A lot of students taking the subject for the first time believe that a trade surplus is good and a trade deficit is bad. However, as in a lot of areas of economics, you can’t categorically say they are good or bad. For instance, a deficit might be caused by importing vast amounts of capital goods which will create value in the economy through jobs and goods which can be sold domestically or overseas. The capital goods can also increase the level of productivity and improve competitiveness of such goods. In some respects deficit countries can be better off than surplus countries, as they are consuming more goods that they are producing.

Is a trade surplus good or bad?

For a lot of countries the purpose of exports is to generate revenue so that they can buy imports of goods which they may not produce – or could produce but relatively less efficient. In China a surplus does keep the export sector industries employed but suggests there is a strong presence for saving or weak domestic demand. More balanced trade would increase the level of imported goods into a country and increase real incomes as the value of its currency rises. This will allow for more inflows of foreign capital from abroad stimulating growth in the domestic economy. It would help a sluggish world economy if surplus countries, like China and Germany, were to spend more on imports.

Reasons for Germany’s trade surplus.

There are three main reasons for Germany’s ongoing trade surplus:

  1. Since the advent of the Euro in 2002 its value has been very weak. This is because the Euro is valued in relation to the entire 19 country eurozone and given the economic condition of the other member states, Germany’s strength in trade is not significant enough to boost the currency. If Germany still had the Deutschemark today it would be no doubt stronger and therefore reduce export competitiveness. It has been calculated that the Euro gives Germany about a 20% price advantage compared to what it would have had if it was still using the Deutschmark and has the largest foreign exchange advantage of any country in the world, with the possible exception of China.
  2. Another reason is that the German government has been running a very tight fiscal policy and also keeping the wages levels down. In the wake of the worries over the eurozone, Germany slashed its public expenditure with reducing public infrastructure spending and been more focussed on running surpluses. This is all very well but they are taking money out of the system which leads to less demand in the global and European economy.
  3. The lower cost of imports of oil and gas increased the trade balance in 2015 by around 1.2%. Without the decline in oil and gas prices, the trade surplus would have fallen compared with the previous year.

Germany’s trade surplus is a worry for countries in the EU as well as overseas in that it is importing demand from other countries and reducing output and employment. This is especially prevalent when you consider that monetary policy in a lot countries has become ineffective. When this happens expansionary fiscal policy – dropping taxes and increasing government spending –  is way of trying to boost demand but even though the fiscal position of the German economy is very healthy they are doing the opposite and being prudent. Germany is one of the few major economies in a position to easily and cheaply increase demand.

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Euro, TradeCurrent Account, Germany

Trump and the German current account surplus

March 9, 2017MarkLeave a comment

germany-surplusIn 2016 Germany recorded the world’s largest current account surplus of €297bn (approx US$315bn) overtaking that of China again to become the world’s largest. The country with the biggest deficit is the USA and head of the National Trade Council Peter Navarro (see earlier blog post) has accused Germany of currency manipulation by having a weaker Euro as compared to the stronger Deutschmark, its previous currency.

As you already maybe aware a weaker currency makes a country’s exports more competitive and imports more expensive. Therefore German cars, tools etc are very competitive on world markets. Trump has indicated that he may put a 35% tariff on imported BMW’s but for America to say that Germany is manipulating its currency is not a winning argument for the following reasons:

1. The Euro is weak as it is more an indication on the Eurozone economy which includes countries which have poor economic conditions – yes if Germany had the Deutschmark again it would be stronger
2. The US is embarking on a policy of expansionary fiscal policy with tax cuts and increased government spending on infrastructure. This will boost jobs but will also increase domestic interest rates which makes the US dollar stronger and thereby reducing export competitiveness of US goods and services but makes imports a lot cheaper.
3. The European Central Bank has cut interest rates to virtually zero and is implemented a policy of quantitative easing (buying back bonds) in order to stimulate the weaker economies in the eurozone.
4. With virtually zero interest rates, German savers are being punished as are German life insurers.
5. Does Navaroo’s allegation hold any creditability when the US is running massive deficits.

The German Problem

In order for German industry to remain competitive employers and trade unions agreed to restrain wage growth – this led to a weakening of the euro. To overcome this imbalances in economies wages should be increasing in Germany as it is a stronger economy and weakening in the poorer countries like Greece and Spain. This means that the latter has a competitive advantage and should attract investment.

Also a ageing population tend not to be big spenders and with the current demographics in Germany, firms are looking abroad to sell their products instead of at home. Ultimately this leads to excess savings which is capital sent abroad

With a current account surplus of 9% GDP the only way this can be reduced is with extreme measures such as:
– Lowering VAT (value-added tax)
– Increasing wages
– Government to increase its spending and run budget deficits

However the surplus is a sign of German’s export prowess and as one German politician said ‘America needs to make better cars”. Only when the German savings are turned into cash will surpluses turn into deficits.

Source: The Economist – Feb 11th 2017

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TradeCurrent Account, Germany

Germany’s current account surplus – causes and consequences.

May 8, 2015May 8, 2015MarkLeave a comment

Germany’s current account surplus, 7.5% of GDP and forecast to go as high as 7.9%, is causing major problems in the eurozone – see graph below.
German Current Acc - GDP

German Current Account Causes

  • Germany’s labour costs have been approximately 20-30% lower that its Eurozone competitors and the German real exchange rate is strongly undervalued relative to the rest of the eurozone. This makes its goods artificially cheap, crowding out those of other eurozone countries from both eurozone and world markets. If Germany still had the D-Mark, it is almost certain that the increased competitiveness of German exports would have caused an appreciation in the German currency. This appreciation would have rebalanced demand – increasing the price of exports and reducing the price of imports. A flexible exchange rate would have moderated the rise in the German current account surplus.
  • German manufacturing has been very competitive in recent years with improvements in productivity, and high-tech German exports have weathered the global downturn, better than many other countries. Germany had less exposure to financial services and has a very competitive manufacturing sector.
  • Germany’s jobless rate is at a very low 4.7%. This should be stimulating demand but the German regulatory and tax structure is geared in favor of output and exports, and against consumption and investment. Furthermore, the German government are running budget surpluses which takes money out of the circular flow. This is when its infrastructure is looking very tired – canals, the rail network and autobahns need upgrading. Investment has fallen from 23% to 17% of GDP since the early 1990’s. Net public investment has been negative for 12 years.


German Current Account Consequences

  • The large current account surplus and undervaluation of currency was good for Germany, but it was holding back exports in other countries. Greater German domestic consumption and targeting higher inflation would provide a boost to global demand and help to stimulate growth in terms of export demand especially in southern Europe. Surpluses steal demand from elsewhere and they export unemployment to other countries. This matters in an era of “secular stagnation” and excess global savings.
  • Given the imbalances in the Eurozone, southern European economies face a long period of deflation as they slowly seek to restore competitiveness against their northern competitors. However, given European wide austerity, this period of deflation is proving very costly in terms of lost GDP and high unemployment.

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Euro, Exchange Rates, Growth, TradeCurrent Account, euro, Euro Crisis, Germany

AS Revision – Current Account Deficit and Exchange Rates

May 11, 2014MarkLeave a comment

With the AS Level resits approaching I thought it would be useful to go through this informative video by Phil Holden which covers part of Unit 4 and 6. Can Current Account Deficits cure themselves? Why a depreciating currency might be both a consequence of and a cure for a deficit.

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Exchange Rates, TradeAS Level Revision, Current Account

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