Current account. In an open economy, manufactured products or GDP (Y) are sold domestically and partially exported. The amount of expenses is divided into consumption (C), investment (I) and government spending (G).Since part of the product is exported, its value must also be taken into account and added upon accrual. On the other hand, the amount of domestic expenses includes expenses for goods and services produced abroad, and to evaluate products manufactured within the country, this part of the import costs should be deducted. If we define the current account balance as the difference between export (EX) and import (IM) (this differencebetween export and import of goods and services is called net export), the main identity of national accounts is presented as follows:
Y = C + I + G + NX, (1)
where NX = EX – IM is a net export. Its positive value indicates a surplus in the current account, negative – a deficit.
This form of recording the main identity of the system of national accounts is the most common. In general, the main identity shows why net exports (or current account balance) are an essential indicator of the state of the economy. If the right side of this identity is the total cost of GDP production, then any changes in net exports will entail changes in the total output and employment. In addition, the main identity of national accounts shows how the values of GDP, domestic spending and net exports are related:
Here, if the output exceeds domestic spending, the value of net exports will be positive and the country exports the difference. If the output is reduced and does not cover the difference, the value of net exports becomes negative, and the country lives in debt, i.e. consumes more than it produces.
Relationship of balance of payments accounts. The relationship between the current account and the capital account can be represented during the transformation of the main identity of national accounts (1) to the form:
Y – C – G = I + NX
We draw attention to the fact that on the left side of the equation we received the value of national savings S. Having rewritten this equation, we get the following:
I – S = – NX
This form of recording the main identity of national accounts shows the relationship between international flows of funds intended for the accumulation of capital (I – S) and international flows of goods and services (NX).
The value (I – S) represents the difference in domestic investment and domestic savings and characterizes the capital account. It shows the volume of investments financed from foreign loans. The current account records funds received from abroad in exchange for domestic net export of goods and services (including net proceeds from the use of production factors). Therefore, in general terms, the value of net NX exports reflects the current account.
From the main identity of national accounts, it follows that the capital account and the current account of the balance of payments balance each other, namely:
NX = – (I – S) = S – I
If investments exceed national savings when (I> S), then missing investments should be attracted from abroad. They will allow the country to import more goods and services than export (IM> EX), i.e. net exports are negative and current account balances are scarce. In this case, on the world stage, the country acts as a debtor. On the contrary, if national savings exceed domestic investment, then excess is used to lend to foreign partners. On the world stage, the country acts as a creditor. In this case, excess current account funds can be used to purchase real estate abroad, provide loans to other countries, as well as to accumulate foreign exchange reserves.
Thus, the capital account and current account balance each other, which as a result means, that international flows of goods and services and international financial flows are two sides of a single international trade process. Their interaction leads to an imbalance in external settlements, i.e. the emergence of either an asset or a deficit, which requires the adoption of adequate measures to equalize the country’s balance of payments in national economic policy. The problems of balancing the balance of payments in the modern period are increasingly international in nature and require targeted and sometimes coordinated actions by the governments of a number of countries, which requires joint decisions and the development of a coordinated economic policy.