If you’re anything like me and got this far and still confused by the Trade balance and Current Account Balance then this blog is for you.
As we all know by now (I – S) + (G – T) + (X – M) = 0.
It all seems very self explanatory Net Private Sector Saving + Government Balance + Current Account Balance = 0.
That is the catch (X-M) is only a stylised representation of the Current Account. (X-M) more accurately is the Trade Balance.
As usual we will be drawing heavily on Bill Mitchell’s work. I think we will let Bill take it from here.
Many people have asked me to explain how one measures the net exports contribution and whether it is the same as the Current Account outcome. So here is a brief explanation drawn from the Australian National Accounts: Concepts, Sources and Methods.
The following ABS Glossary is also very informative.
A non-resident is defined as:
Any economic entity (individual, enterprise or other organisation) ordinarily domiciled in a country other than Australia. Note that foreign branches and foreign subsidiaries of Australian enterprises and other external territories are regarded as non-residents.
Primary income represents
* compensation of employees;
* reinvested earnings;
* investment income attributable to policy holders in insurance, standardized guarantees, and pension funds;
* and taxes and subsidies on products and production.
… include current transfers that offsets to the provision of resources that are normally consumed within a short period (less than twelve months) after the transfer is made. Examples include food aid, remittances from residents temporarily abroad, and remuneration received by international students undertaking university studies.
The Current Account is “the sum (net) of credit and debit entries for goods, services, primary income, and secondary income”.
I constructed the following Table to show the sequence of transactions that help us understand how net exports and the primary and secondary income flows are accounted for.
So the first rows describe the components of aggregate demand which drive output – C + I + G + (X – M).
So the contribution to real GDP growth from the external sector is measured by (X – M) which is also the Balance of Trade. That is, the sum (net) of the credit and debt entries fro goods and services.
In addition, to this flows of primary and secondary income are recorded between Australia and the rest of the world. They are shown in net terms (NPI and NSI) in the Table. These flows are sometimes called “invisibles” meaning they are not goods and services. They are added to the Balance of Trade to give the Current Account Balance (CAB).