[MUSIC] We've been talking about the different kinds of imbalances, deficits and surplus. We're going to start looking at the moment at countries that are deficit countries and surplus countries. But I just want to underline before we turn to that again, what they mean and why they are a problem, or if they are a problem, so that we can step into how a country could correct its current account deficit or surplus. We've said, and I've been stressing it through the previous sections, a current account surplus happens because a country consumes less than it produces or because saving rates are high. So we have some countries in the world, and we could mention Germany, we could mention Japan, we could mention China, where they're current account surpluses because they have very high savings. And as we said when we were thinking about at global marketplace, these countries lend their savings to the rest of the world so other countries will buy their output. In other words, think about this country, they baked a cake, right? They eat C plus I plus G out of the cake, and they've got something left over. They need to get rid of it, okay? So they lend the money to the rest of the world so they will buy their excess output. Is this a problem? Well, no, if you've got a good place to lend your savings abroad, if you're pretty sure you'll get it back. If the foreigners who borrow your money are going to repay it, then it's not a problem. You should also remember that these countries are very dependent on the rest of the world. They need foreign demand to buy that excess output they didn't eat, the piece of their cake that they didn't eat domestically. So if foreigners will borrow money from them and buy that extra piece, these countries can continue to grow, they can continue to retain their size, and have a high savings rate. Now, we've also said that the current account deficit occurs because a country consumes more than it produces. It spends more than it earns because savings rates are low or because the country is a borrower, okay? So this country is borrowing from the rest of the world in order to, it bake the cake, right? It eats the whole cake and it needs some more. So it's borrowing from the rest of the world so it can buy that extra cake, to satisfy its excess consumption. Is this a problem? Well, not if other countries are willing to lend it, the money, to buy the extra cake, right? Not if other countries are willing to lend them money to sustain this excess consumption. Now, of course, they have to be willing to lend them the money and they have to be willing to charge reasonable rates on those loans. So if the country can get abundant money like the United States does, it's a current account deficit country, the rest of the world is happy to lend it money at low rates. Then, it's fine to be running this deficit. Of course, we have to remember that, that debt is increasing every year. Could there come a point where that total debt is too high? That's possible, also we would have to think about what it costs to service that debt. But as long as this countries can borrow, they can continue consuming more than they produce. And they can provide extra demand to the countries that don't eat their whole cake, right, and have a piece to sell. How could you correct these deficits and surpluses? Now this is a topic in the current political debate, because there are countries that have trade deficits and they are concerned about them, and they say, it's the other country's fault that we have these huge trade deficit. Well, the bottom line is not changing the value of your currency, putting up barriers to other countries, etc. The bottom line is you can eliminate your deficit or eliminate your surplus by changing your spending or your saving habits. Imagine a country that's a deficit country. And we said it in the previous section when we were looking at net borrowing in the country. If we collect all the sources of spending on one side, G and I, and we collect the sources of income or saving on the other side, SNT, a country with a deficit would be one where G + I is greater than T + S. How can I get rid of that deficit? Well, I either have to decrease G or I, or I have to increase T and S. In other words, the country that has a deficit has to find a way either to balance its government budget, put it in to surplus, or for the private sector to borrow so much. We don't say this in the public debate, do we? The government's deficit can determine the current account deficit, and it's important to keep those two apart. If a country is a surplus country, how can it correct its surplus, assuming that it wants to? Well, again, thinking of that same equation, G + I in this country is smaller, then S + T. How can a country get rid of the surplus? Their government needs to spend more. Their investors need to invest more. Or they need to save less and collect less in taxes. This is the true bottom line, and something that we don't often talk about in the public debate. [MUSIC]
