The Current Account and External Indebtedness

This chapter talks about net borrowing and net saving by a country. In a closed economy, saving equals investment, but in an open economy, domestic businesses can invest heavily even if residents aren’t saving. Capital mobility is discussed for open economies, as well as the current account of a country, which can be defined as the net accumulation of assets abroad. Current account imbalances can be measured as an account of trade flows, an account of spending and output, or an account of saving and investment. Using mathematical equations such as the national income account identity, Professor Sachs explains trade balances and imbalances and current account imbalances. Trade and current account imbalances may have nothing to do with trade policies, but may be the result of a country saving less than it’s investing. Sachs talks about absorption and shocks and concludes by discussing investment spending.

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