Economic Report President

of the economy’s current transactions (as distinct from its capitaltransactions, such as borrowing in the form of foreign loans). The mostimportant of these other sources are interest and investment earningsreceived on foreign assets (and paid on foreign liabilities), and aidgrants and transfers.A country’s current account balance also equals the differencebetween its gross national income (the sum of gross domestic productionand net income received from abroad) and its spending (the sum ofprivate and public consumption and investment spending). Sincenational saving is the difference between gross national income andtotal consumption, the current account is also equal to the differencebetween national saving and domestic investment. If a country’snational income exceeds its spending, or, equivalently, if national savingexceeds domestic investment, the current account will be in surplus.If instead a country spends (that is, consumes and invests) morethan its national income, investment will exceed saving, and the currentaccount will be in deficit.For the current account to be in deficit–that is, for investment toexceed saving—a country must be able to finance that deficit throughcapital inflows (borrowing) from the rest of the world. A country’s currentaccount deficit for a given period therefore equals the increase inits net foreign liabilities in that period (or the decline in its net foreignassets, if the country is a net creditor). Conversely, current accountsurpluses, which reflect an excess of saving over investment, increasea country’s net foreign assets (or reduce its net foreign liabilities).Business cycles, long-run growth, and the current account. Theargument that current account deficits inevitably cause a net loss injobs and output is at odds with the evidence. Rapid growth of productionand employment is in fact commonly associated with large orgrowing trade and current account deficits, whereas slow output andemployment growth is associated with large or growing surpluses.Chart 6-6 shows, for example, that the U.S. current account improvedduring the recessions of 1973-75, 1980, and 1990-91, but declined duringthe cyclical upswings of 1970-72, 1983-90, and 1993 to the present.This reflects both a decline in demand for imports during recessionsand the usual cyclical movements of saving and investment. During arecession both saving and investment tend to fall. Saving falls ashouseholds try to maintain their consumption patterns in the face of atemporary fall in income; investment declines because capacity utilizationdeclines and profits fall. However, because investment is highlysensitive to the need for extra capacity, it tends to drop more sharplythan saving during recessions. The current account balance thus tendsto rise. Consistent with this, but viewed from a different angle, thetrade balance typically improves during a recession, because importstend to fall with overall consumption and investment demand. Theconverse occurs during periods of boom, when sharp increases in257