[MUSIC] There are other reasons that will contribute to a country showing a current account surplus or deficit besides this issue of spending, which is the bottom line, right? If you want to talk about underlying issues, that's it. But there's some other ones that can influence what's going on. For example, if a country receives very heavy capital inflow. Say that I'm a country that's perceived by the world as a safe place to put your money. This can cause the country to have a current account deficit. Now it won't determine it, but it can cause sometimes that to happen, all other things remaining equal. So imagine the United States, which would seem as a safe haven around the world, both it's currency and it's assets. So imagine that foreigners want to buy U.S bonds because they are more attractive. U.S bonds are denominated in dollars. Everybody trusts the dollar, and they believe they can get their money back. So foreigners, in order to buy those bonds, they're going to have to have to earn the income because they purchased them with dollars, as we talked about in another section. So they will have to export goods and services to the United States and they're going to have to earn a surplus, in order to be able to invest it in U.S bonds. And so at the same time besides this, as money goes into the United States as we discussed in our exchange rate section, this will push up demand for the U.S dollar because there's an increased demand for US assets and will increase the U.S dollar's value. This means then that U.S companies, all other things being equal, will face that high dollar when they export and their goods will be more expensive abroad. This contributes to a larger trade deficit, which could be a larger current-account deficit or a smaller surplus. So you can see that often a country that has a reserve currency like the United States ends up being a country with a current-account deficit because of that dynamic. Another thing that can influence the current-account surplus or deficit is the business cycle itself. So, as the economy goes across ups and downs in the business cycle, the current account surplus or deficit may change. For example, when we're up at the top of the cycle in an inflationary gap, like we discussed in the earlier course. We'll find, if we're thinking about these different sources of net borrowing in the economy, we'll find that most investment and saving will go up as we go into an inflationary gap. Now, let's ignore the government section for the moment. Investment and saving will both tend to go up, but investment goes up more. So this will tend to generate a current-account surplus, if you think about the equation we discussed in the earlier section. Additionally, we find that as we go across the business cycle, the current account is influenced. Sometimes, the business cycle itself can cause these deficits or surpluses to arise. So, if you go back to what we discussed in the previous section when we talked about net borrowing in the economy, imagine that an economy is up in its inflationary gap. It's at the top of the cycle. What we find when we're up there is that both investment and saving will rise, but since investment is more volatile, it tends to rise more. Therefore, when we're in that inflationary gap we tend to have current-account deficits. Another way to think about this is when we're in the inflationary gap, there's lots of demand in the economy. The economy tends to absorb most of its own production and needs more because consumption is so strong. So there's a tendency, when we're at the top of the business cycle, to have current-account deficits, or for existing deficits to get bigger. When we're at the bottom of the cycle, the opposite happens. So, say we're in a recessionary gap, thinking about net borrowing, I and S will both decline. But, since I is very volatile, very sensitive to the cycle, it will decline more. And therefore we will tend to go into surplus at the bottom of the business cycle. Or to think of it this way, I'm down on the business cycle, C plus I plus E are not very strong. Companies, in order to maintain their sales, are going to push hard to try to export, to try to sell abroad, in order to compensate for falling demand at home. And so we will tend to get a current-account surplus, or a smaller deficit if we have one, when we're at the bottom of the business cycle. [MUSIC]
