[MUSIC] We've the difference between having a current account deficit and current account surplus and what it tells you about your country. And I'd like to move in here now to think about what it tells you about the growth model for your country. And just, as we go there, I'd like to review really quickly what we've been saying about current account deficit and current account surplus countries. Deficit countries are countries that consume more than they produce. They bake the cake, they want some more, it's not enough. Surplus countries are countries that consume less than they produce. Bake the cake, have a big piece left over. Deficit countries are countries that can drive their own growth with domestic demand. We haven't talked about this, we've only implied it. But if you think about GDP equals C + I + G + X- M, deficit countries C + I + G are strong enough to consume everything they've produced, okay? Surplus countries, it's not enough. They need foreign demand in order to grow. So hat's a big difference between the two. Deficit countries have to borrow to maintain their high levels of consumption. Surplus countries have to lend so the rest of the world will buy their goods. A real bottom-line difference between the two is that, if the rest of the world disappeared, for deficit countries, their GDP would be higher. Because remember, in our equation, we subtract off imports, and that's a big item, okay. If the rest of the world disappeared, surplus countries would be smaller, okay? So keep in mind those characteristics and let's have a look at a group, first, of current account surplus countries. And then we'll turn to some current account deficit countries. Let's look first at Germany. Now you can see if you look at this graph that Germany has a large, growing account surplus. In fact, it's one of the largest in the world that the present time. Where does that come from? Well, Germany is a country with a high savings rate. And, as we've seen, that drives current account surpluses. It has an aging population. This also tends to reduce domestic demand, because your older people are tending to save, to put away for their retirement, right? At some point they'll start to liquidate that, and then they will not be a saving country. It has a very large merchandise trade surplus. in fact, it's the largest one in the world right now. And it has had growing current account surpluses since 2001. Right now they are massive. And if that surplus were to disappear, we have to remember that German growth would be much lower or negative without that surplus, because they rely on the rest of the world for their growth. How could they get rid of it? Well, they could stimulate domestic demand. Remember, we could raise G, raise I, or we could reduce T or reduce S. But that's not happening. Instead the government is trying to get a fiscal surplus. And, in fact, because I already moved there, so T is higher, G is lower. Remember that Germany relies on foreign demand to sustain its size, to sustain its growth. In a sense we would say it is supersized. Without the surplus, it could not be so big. Then turning to another country very much in the news because of its surplus is China. China has a current account surplus. It's a country with a high savings rate and in an aging population, very much like Germany. And it has managed to grow, not thanks to it's domestic demand, but thanks to foreign demand. So the whole Chinese miracle comes on the back of very large trade surpluses and current account surpluses, year after year, which provided the excess demand that they needed in order to grow. These are now declining, okay? So that's something to keep an eye on in China. China maybe C plus I plus G may be growing enough that X minus M will not always be positive. Without theses surpluses though, China is still in a place where it could not sustain its high growth rates or be as large a country. And you have to remember that a country with a surplus, one of the key points of its growth strategy is the value of its currency. If your currency goes up, then it might be you won't be able to export so much and you'll import more. And the x minus m item would go down, and you would grow less. But China has been hoping for some time that C + I + G would move over and take over as the engine of growth. That has not occurred yet, I has risen but C has not. So China still relies on foreign to sustain its size, to sustain its growth. And then finally in this surplus countries, we've got Saudi Arabia. Now Saudi Arabia is a country, because of it's oil output, not because it's a big saving country and necessarily culturally, but because of its oil output, it produces much more GDP than it could ever consume, right? Because there is so much oil, and its price has been so high. So Saudi Arabia has a large current account surplus. In fact, a massive current account surplus, which has just turned in recent years to a deficit. Which when oil prices collapsed in 2014, one of the most interesting things to happen on the balance of payments front. But before 2014 these were some of the largest current account surpluses in the world. There were times when they were near 30% of GDP. What happened as a result is Saudi Arabia accumulated savings in its reserves. It got to $700 billion in reserves. These are now declining, as it turns into a current account deficit. We should mention that China is also a country that has massive reserves. They reached about $4 trillion, and are now declining. [MUSIC]
