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Location: Macroeconomics Unit VI - Open Economy, International Trade and Finance
Discussion: Current Accout and Captial Account
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tsaojames1991 |
Current Accout and Captial Account
Apr 25 2008, 9:21 AM EDT
When two countries trade, most times one country ends up with a positive current account and a negative capital account while the other country ends up with a negative current account and a positive capital account. ( such as China and the U.S). What are the advantages and disadvantages of both sides? Which country would you rather be? why?
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HelenChu |
1. RE: Current Accout and Captial Account
Apr 27 2008, 10:26 AM EDT
I think when you have a capital account surplus, you have relatively more leverage over the trade relationship than if you have a current account surplus. When you own and thus control so much of the assets that are related to the goods and services in the current account, countries can't treat you lightly without risking their economies.
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ElaineLung |
2. RE: Current Accout and Captial Account
Apr 27 2008, 12:02 PM EDT
"I think when you have a capital account surplus, you have relatively more leverage over the trade relationship than if you have a current account surplus. When you own and thus control so much of the assets that are related to the goods and services in the current account, countries can't treat you lightly without risking their economies. "True, but in the case of a capital account surplus, you can't treat the other country lightly either, since the value of the foreign assets you hold depends on the economic well-being of the other country. Trade is definitely a two-way relationship. Do you find this valuable? |
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richardtu |
3. RE: Current Accout and Captial Account
Apr 28 2008, 6:51 AM EDT
I agree that trade is definitely a two-way relationship. Well, lets say, in the capital account, China maintains a deficit, for what? It is to off-set its current account surplus. Also, China uses its capital account (financial assets) to buy foreign bonds (U.S), this is to make US increase its spending on Chinese imports.
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howardlin |
4. RE: Current Accout and Captial Account
Apr 28 2008, 6:51 AM EDT
I think this thing is really a cycle.... its a cycle between developing and developed. because technology is constantly improving, there isn't really an ending to it. And it isn't really your countries' choice to be either a positive current account and a negative capital account or vise versa. Its decided by the other countries around you.
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JackLo |
5. RE: Current Accout and Captial Account
Apr 28 2008, 7:05 AM EDT
I'm on Elaine's side for this one. It really depends on the cultural values. Western society promotes more liberal consumption and a carefree (relatively) lifestyle. On the other hand, the Chinese are more conservative and they believe that it is in their best interest to maintain a deficit in their capital account and keep the RMB weak.
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TimChu |
6. RE: Current Accout and Captial Account
Apr 28 2008, 7:30 AM EDT
I definitely agree that it is a two way relationship. It's like owing someone money. Sure if someone owes you money then you have a significant amount of leverage. But push that relationship too far and you don't get any sales from that person anymore. Countries have to find that balance that they want. For China, it may be having a surplus in capital accounts but i don't really think that the ratio of current and capital account have that much of an affect on a country as long as the two are not at extremes.
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KatherineYang |
7. RE: Current Accout and Captial Account
Apr 28 2008, 7:55 AM EDT
A lot of what is said makes sense, in the global sense, two countries don't always trade with each other. Everyone trades with each other, so as long as a country balances the two out, they have both sides of the coin anyway. Leaning too far in any direction won't be good.
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jacqueszhang |
8. RE: Current Accout and Captial Account
Apr 28 2008, 8:19 AM EDT
I think China's position is pretty good now, where it exports far more than it imports from the US, and thus runs a negative capital account as it continues to purchase US assets and bonds. This way, it is able to maintain its exports and GDP while having a reliable source of assets to rely on. The sad thing is that the dollar continues to decline...
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MichaelChow |
9. RE: Current Accout and Captial Account
Apr 28 2008, 8:48 AM EDT
In continuation to what Jacques has already mentioned, China's position on the modern day is relatively a desired position to be especially being the growing/developing country it is. Although China holds much of US debt they are losing out on a lot of "money" as the US dollar is constantly declining. Therefore the assets China relies on is unstable.
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jeewono |
10. RE: Current Accout and Captial Account
Apr 28 2008, 9:14 AM EDT
It makes sense that having capital account surplus seems better in a trade relationship because the country will have a lot of assets, but like Elaine said, countries depend on each other, and therefore we cannot conclude whether having a current account surplus is better than having a capital account surplus. China does have a great leverage over the global economy, yet the depreciation of the USD may cause instability.
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Chanmin |
11. RE: Current Accout and Captial Account
Apr 28 2008, 9:20 AM EDT
Oh my James. What a brilliant question. Having a positive current account helps by giving the country a lot of income from exports. Having a negative capital account gives the country financial and real assets. I think having the negative current account may be nice because as we learned the United States is very dependent on China due to this.
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andyxu |
12. RE: Current Accout and Captial Account
Apr 28 2008, 9:30 AM EDT
Obvious, the trade relation benefits both the exporting China and the importing US, or else it probably wouldn't happen. Among those benefiting the most are Chines producers for exports, US consumers and Chinese workers. If we examine this relationship in the short run, we can say that the United States is consuming beyond its PPC curve while China is producing and exporting to satisfy the US consumerist appetite. In terms of exchange rates, we can see that without strict currency policies, the value of the US Dollar against the RMB will probably sink.
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jeffye |
13. RE: Current Accout and Captial Account
Apr 28 2008, 9:42 AM EDT
I agree with the people who stated that trade is a two-way relationship. For example China holds a large amount of American bonds and thus holds a large influence on American economony and keeping the dollar strong. However, China also needs the business of the U.S. in order to gain profit and thrive itself. With this in mind, there is no "better" position to be in as both countries need each other in order not to collapse.
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nicolewong |
14. RE: Current Accout and Captial Account
Apr 28 2008, 9:49 AM EDT
In the long run, I'd rather be in the country that's having a positive current account, as is clear with China's booming economy and the U.S.'s one in recession. If I had a positive capital account, that would mean people are investing in my country more than I am investing in theirs, meaning that in the long run "my" country would benefit less.
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judy_chen |
15. RE: Current Accout and Captial Account
Apr 28 2008, 10:20 AM EDT
I would rather be in the country with positive current account, I think it's better for the economic growth, as the effect of purchase and sale can be directly shown, however, the effect of investment would take longer time to see the results.
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KristieChung |
16. RE: Current Accout and Captial Account
Apr 28 2008, 10:40 AM EDT
I agree with everyone that said that the trading is definitely a two-way relationship. There must be some countries who have positive current accounts and negative capital accounts, and other with negative current accounts and positive capital accounts. I'm not sure which country I would rather be though.
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Calvinlu |
17. RE: Current Accout and Captial Account
Apr 28 2008, 2:39 PM EDT
I agree with the idea that trade is a two-way relationship. However, i rather be the country with current account surplus, beacuse pumping money back into the capital account of another country increase its spending power, and thus can buy more imported products, thus increase my current account surplus even more.
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kevinhuang |
18. RE: Current Accout and Captial Account
Apr 29 2008, 5:05 AM EDT
An example of this two-way relationship would be China and the US. Chine holds a huge reserve of US foreigncy while the US purchases many goods from China. The US is currently failling China cannot back out because this is a two-way relationship. If China backs out, their massive reserves of US dollars become worthless, which is why China must continue supporting the US.
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dayzrox |
19. RE: Current Accout and Captial Account
Apr 29 2008, 5:39 AM EDT
As many have already said, I agree that neither a negative current account and positive capital account situation nor its converse is "preferable." This is true as neither is an accurate gauge to measure one economy's well-being. It is only when the balance of payments ultimately even out that a true meaning can be attached to the numbers. Not only that, a balance-of-payments deficit is not necessarily bad, just as a balance-of-payments surplus is not necesarily good. To answer your question, however, I would rather be China (It's a rising superpower that also holds nearly all of American debts).
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