Why does the current account surplus mean domestic savings > domestic investment? I get how to sort it out with the formula but can someone help me understand exactly what the difference is and the logic here…
thnx
Firstly, this is related to Balance of Payment. Balance of payment, in the easiest sense, is a double entry book keeping system for a country. The BOP covers all the transactions, inflows and outflows. These transactions can be further classified into transactions that record flow of services and goods and transactions that record flow of capital and investment. The current account records transactions related to the flows related to the goods and services.
Having said that, these transactions that are recorded in the current account and capital account deal both with the inflows and outflows. Now, if a country has a current account surplus, that means its inflows (exports) are greater than its outflows (imports). in other words it sells goods and services to other countries more than it buys it.
So how would you define domestic savings vs domestic investment? exports would be foreign investment right? so domestic investment would be companies buying factories for example? What is domestic saving? Does that just mean exports?
My insights:
Current account (+/-) = Exports - Imports + income from abroad + net transfers
And how this reflects the difference between savings and investments?
When a country becomes a net borrower (it has a deficit in current account), it is because the country is importing more goods than exporting, so this is looked at a bad scenario. However, this is not always bad. In fact, many countries that today have good or even developed economies have been some day net borrowers (had big current account deficits). What they did is to achieve capital assets through imports to get higher revenues in the future, so then turned a current account deficit into a current account surplus. How could they import more than they export? Those countries had to borrow money from foreign countries to be able to invest more than they had on local savings. The result is Investments > Savings.
Exactly the opposite happens when the country has a current account suplus, it is a net lender; exports are higher than imports; Investments < Savings and the excess of savings are lent to foreign countries.
Answering your last questions:
What is domestic investment? : Is the public and private investment inside the country/nation.
What is domestic savings? : Are the aggregate amount of savings in the entire economy, the money you have on the bank, deposits, and very liquid or short-term securities. In fact, savings are the portion of disposable income that is not invested.
Exports would be foreign investment? : No, they have nothing to do each other. You should do some research about foreing investment on internet.
Domestic investment would be companies buying factories for example? : Yes, but only for be used inside the nation, if they are used inside other nation, that investment would be considered “foreign investment” in THAT other country. Do you get the difference?
Any question please help!
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Ah-- I think a lot of this helps…thnx!