Naked Economics: Undressing the Dismal Science pdfdrive com

Current account surplus/deficit. The U.S. current account deficit in 2008 was
around $700 billion. Is it time to rush to the supermarket to stock up on canned
goods and bottled water? Maybe. The current account balance, which can be in
surplus or deficit, reflects the difference between the income that we earn from
the rest of the world and the income that they earn from us. The bulk of that
income comes from trade in goods and services. Thus, our balance of trade,
which again can be in surplus or deficit, is the largest component of the current
account. If we are running a trade deficit with the rest of the world, then we will

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almost always be running a current account deficit, too. (For the purists, the U.S.
current account would also include dividends paid to Americans who own
foreign stocks, remittances sent home by Americans working overseas, and other
sources of income earned abroad.)
When the current account is in deficit, as ours is now, it is usually because a
country is not exporting enough to “pay” for all of its imports. In other words, if
we export $50 billion of goods and import $100 billion, our trading partners are
going to want something in exchange for that other $50 billion worth of stuff.
We can pay them out of our savings, we can borrow from them to finance the
gap, or we can sell them some of our assets, such as stocks and bonds. As a
nation, we are consuming more than we are producing, and we have to pay for
the difference somehow.
Oddly, this can be a good thing, a bad thing—or somewhere in between. For
the first century of America’s existence, we ran large current account deficits.
We borrowed heavily from abroad so that we could import goods and services to
build up our industrial capacity. That was a good thing. Indeed, a current account
deficit can be a sign of strength as money pours into countries that show a
promising potential for future growth. If, on the other hand, a country is simply
importing more than it exports without making investments that will raise future
output, then there is a problem, just as you might have a problem if you
squandered $100,000 in student loans without getting a degree. You now have to
pay back what you borrowed, plus interest, but you have done nothing to raise
your future income. The only way to pay back your debt will be to cut back on
your future consumption, which is a painful process. Countries that run large
current account deficits are not necessarily in financial trouble; on the other
hand, countries that have gotten themselves into financial trouble are usually
running large current account deficits.