Some Sense on the Trade "Deficit"

by Don Boudreaux on June 25, 2006

in Balance of Payments, Trade

In an op-ed in today’s Washington Times, the Cato Institute‘s Alan Reynolds nicely exposes much of the misunderstanding and illogic that propel many people to fret about America’s current-account deficit.  After pointing out that a current-account deficit is identical to a capital-account surplus, Reynolds reports some figures on current-account deficits and economic growth:

The Economist’s survey of world forecasters estimates the current account deficit will reach 7.3 percent of gross domestic product in Spain this year and 5.6 percent of GDP in Australia. I think the U.S. current account deficit will be about 6½ percent. The flip side is that 61/2 percent of GDP measures the difference between foreign investment rushing into America minus U.S. investment flowing abroad. We have a large capital surplus, otherwise known as a current account deficit.

What do countries with large capital account surpluses have in common? Economic growth over the last year was 3.1 percent in Australia, 3½ percent in Spain and 3.6 percent in the United States. The expected current account deficit is smaller in the United Kingdom (2.7 percent), yet British economic growth is also slower (2.2 percent). India’s current account deficit is running about 2½ percent of GDP. By contrast, Germany has a perpetual current account surplus and a pathetic economic growth rate long been stuck close to 1 percent.

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JSK July 2, 2006 at 10:34 am

@article:
" What do countries with large capital account surpluses have in common? Economic growth "

Jep, but also the switching of ownership from domestic to foreign hands. The capital account surplus is nothing but the export of assets and government [b]debt[/b] to other countries. For the US, Spain and Australia hold: grow now but pay later.

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