Consider the current account balances for China and the United States:
a. Explain the four different ways of looking at a current account deficit.
b. Discuss: If China stopped buying U.S. Treasury bills, the U.S. current account deficit would shrink. Which of the four views of a current account deficit is useful in this context?

Question

Quizplus · Accepted Answer

The Answer is a. i. Definitional Approach: Define current account as the difference between exports and imports.
ii. Absorption Approach: Domestic Supply - Domestic Demand yields GNP - (C+I+G) = Current Account Balance
iii. Sources of Funds - Uses of Funds yields Current Account = Savings - Investment.
iv. Buying more than we sell must mean we have to borrow: Current Account = Change in our External Debt position.
b. Method 4: Current Account = Change in our External Debt position.

Consider the Current Account Balances for China and the United