Chapter 5: Theories of current account balance behavior5.1 IntroductionWhy do some countries have current account deficits while others have surpluses? If acountry has a deficit, will this condition self-correct or must policy makers take actions to changethe situation? If actions must be taken, what policies are available, and, if they exist, how would theywork? Over the years, economists have developed several theories of current account behavior toanswer questions such as these. We turn now to consider two examples. As it turns out, the twotheories that we consider look at the issue from alternative points of view and emphasis. As such,they provide somewhat, though not entirely, different answers to many of the questions raised earlier. To understand better, consider again the basic categories of the balance of payments table:Goods tradeServices tradeIncome flowsUnilateral transfers 9the line (drawn here for the current account) Capital accountFinancial accountThe line shown above indicates how the current account is calculated. Above the line, credits anddebits items are netted out to arrive at a value for the CAB. Items netted out below the line representhow the current account balance is financed. In other words, it spells out the net international tradein financial assets and liabilities required in order to pay for the trade activities that occurred abovethe line. The first of the two current account models that we will consider focuses on internationaltrade in goods and services, the activities above the line. This theory is known as the elasticitiesmodel. The second model focuses on international flows of financial assets and liabilities, theactivities below the line. This model is known as the intertemporal model.
has intentionally blurred sections.
Sign up to view the full version.