Mathematically speaking the current account is defined as: $$\text{CA}=S-I$$

where $S$ is savings and $I$ is investment.

We know for a closed economy $S=I$ so $CA=0$. practically speaking for an open economy what is the difference between these two terms?


Yesterday I gave an example of an economy based on grains of wheat where the real domestic activities were

  • Plant wheat grains, grow them and harvest them, getting more grains as a result
  • Consume wheat as food
  • Store unconsumed wheat for future planting or consumption

In an open economy there are two further possibilities

  • Send wheat grains abroad (e.g. exports)
  • Receive wheat grains from abroad (e.g. imports)

So saving represents the excess of production of wheat grains over consumption, while investment represents a combination of planting grains for future production and increasing stocks of grain.

In this open economy, you then get the macroeconomic tautology that the increase in stocks must be equal to production plus imports minus the sum of consumption and use for planting and exports. Rearrange this and you get that saving (production minus use for consumption) minus investment (use for planting plus increase in stocks) must equal exports minus imports (in effect the balance of trade or, if you take into account other foreign income, the current account balance), i.e. $S-I = X-M$ or $CA=S-I$

You may then want to translate this into monetary terms using the price of wheat, or in a more complicated economy the price of all the stuff involved, but the key is to recognise this is about stuff measured in monetary terms rather than about money


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