BALANCE OF PAYMENTS

Current Account in the balance of payments

Current Account In The Balance Of Payments

Introduction

It might be argued that exchange rate regimes are not really connected with global current account imbalances. Global current account imbalances have been associated with all kinds of exchange rate regimes. Spain has a large deficit while the Netherlands has a surplus. Yet both have a fixed exchange rate to the Euro, i.e. they are both part of the Eurozone. (Hellerstein, 2008) Of course, the Euro itself floats relative to the principal non-Euro currencies. This paper discusses how relevant is the current account surplus or deficit as a measure to a county''s economy performance.

Discussion

In the nineteen eighties the US current account deficit and the Japanese surplus were the main international imbalances, and Japan certainly had to suffer continuous criticism from the United States. Now, again, Japan is one of the major surplus countries and, as usual, the United States is the major deficit country. Yet both the United States and Japan have floating rate regimes; and in the case of Japan there is only occasional intervention. Thus a floating rate regime between them is obviously no inhibition to a current account imbalance

United States

The deficit in the broadest measure of foreign trade shrank in the spring to the lowest level in relation to the total economy in 10 years, another dramatic sign of how much the recession had reduced America's appetite for foreign goods. The Commerce Department said Wednesday the deficit in the current account dropped to $98.8 billion in the April-June quarter. That represented 2.79 percent of the total economy as measured by the gross domestic product, the smallest percentage since the first quarter of 1999 when it was 2.77 percent. The deficit was down 5.4 percent from the first quarter's revised total of $104.5 billion. Analysts had been forecasting a second quarter deficit of $92 billion. The current account is the broadest measure of trade because it includes not only trade in goods and services, which are tracked on a monthly basis, but also investment flows between countries. It is closely watched by economists because it is a measure of how much the country must borrow from foreigners to finance its balance of payments imbalance. The improvement in the second quarter came almost entirely from a large narrowing of the deficit in goods, which dropped to a deficit of $361.6 billion in the second quarter, down from $373.4 billion in the first quarter. That improvement reflected sharp declines in imports of a variety of products as the steep recession reduced demand by both businesses and consumers for foreign products. The government's monthly reports had also shown a decline in the deficit in goods and services in the spring with the May monthly deficit dipping to the lowest level in nearly nine years. However, the monthly deficits widened in June and July, indicating that the low point for the trade deficits may have been reached. Economists were actually encouraged by the widening trade deficits, seeing them ...