ABSTRACT
Aside from national income and employment, few macroeconomic aggregates have received the prominence that is commonly accorded to the current account balance. The objective of this book is to elucidate the significance of this account in the balance of payments.1 Other macro magnitudes which governments attempt to influence, such as unemployment, growth and inflation, have welfare implications that are reasonably intuitive. The current account balance, being the net outcome of sources and uses of foreign currency for ‘current’ purposes, is much less transparent. Indeed, it is curious that an imbalance on the current account in the balance of payments is sometimes regarded as detrimental and sometimes beneficial depending on the focus of the analysis. In particular, if the current account balance is viewed as a net use of foreign exchange, deficits have often been taken to signal problems for macroeconomic policy, particularly exchange rate management. On the other hand, when a perspective recognising that current account imbalances allow for differences to exist between national investment and saving is taken, a favourable judgement is often made. From this viewpoint it identifies the potential for a more efficient use of world saving made possible by financial capital mobility. Another interpretation stems from the fact that current account imbalances are the source of a country’s net obligations to foreigners. Net indebtedness to foreigners is sometimes held to be a burden for domestic residents. Because these different perspectives on the current account are connected by identities, divergent judgements on its ultimate net benefit cannot all be right. Moreover, it is important to be clear about these issues because governments have often used a variety of macro-and microeconomic policies to affect current account balances.
