Do Current Account Deficits Matter?

• Author: Atish Ghosh and Uma Ramakrishnan
• Position: Division Chief/Senior Economist in the IMF's Policy Development and Review Department

THE CURRENT account balance may seem to be an abstruse economic concept. But in countries that are spending a lot more abroad than they are taking in, the current account is the point at which international economics collides with political reality. When countries run large deficits, businesses, trade unions, and parliamentarians are often quick to point accusing fingers at trading partners and make charges about unfair practices. Tension between the United States and China about which country is primarily responsible for the trade imbalance between the two has thrown the spotlight on the broader consequences for the international financial system when some countries run large and persistent current account deficits and others accumulate big surpluses.

The IMF, whose mandate includes promoting and maintaining an open international trade and payments system, has recently started multilateral consultations on global imbalances with the major players: China, the euro area, Japan, Saudi Arabia, and the United States. Back to Basics tries to remove the emotion from the issue and examine whether current account surpluses and deficits even matter.

Measuring the current account

A good starting point is to ask what a current account deficit or surplus really means and to draw insights from the many ways that a current account balance is measured. First, it can be expressed as the difference between the value of exports of goods and services and the value of imports of goods and services. A deficit then means that the country is importing more goods and services than it is exporting-although the current account also includes net income (such as interest and dividends) and transfers from abroad (such as foreign aid), which are usually a small fraction of the total. Expressed this way, a current account deficit often raises the hackles of protectionists, who-apparently forgetting that a main reason to export is to be able to import-think that exports are "good" and imports are "bad."

Second, the current account can be expressed as the difference between national (both public and private) savings and investment. A current account deficit may therefore reflect a low level of national savings relative to investment or a high rate of investment-or both. For capital-poor developing countries, which have more investment opportunities than they can afford to...