Does a Capital Account Surplus Necessarily Imply a Trade Deficit?
By David Henderson
Bob Murphy explains why. He points out that a capital account surplus necessarily implies a current account deficit. But, he notes, a current account deficit is not the same as a trade deficit. Why? Murphy writes:
The current account in turn consists of the trade balance (which itself is separated into goods and services, but I’m not worrying about that here), but it also includes the net earnings of Americans on foreign assets.
Murphy gives two numerical examples. Unfortunately, neither is an example in which there is capital account surplus and a balance of trade surplus. But here’s my numerical example of a capital account surplus and a balance of trade surplus.
Say that foreigners invest $1 trillion in the United States this year and that Americans invest $800 billion in other countries this year. That means that this year’s capital account surplus is $200 billion.
So there must be a current account deficit of $200 billion.
The current account has two components. One is the balance of trade on goods and services; the other is the difference between Americans’ earnings on their foreign assets and foreigners’ earnings on their assets in America. So if Americans earn $400 billion on their foreign investments this year and foreigners earn $700 billion on their investments this year, the net contribution of the earnings component of the current account deficit is $300 billion. That is, the current account deficit from that component is $300 billion. But the current account deficit is only $200 billion. Therefore the U.S. balance of trade on goods and services must be a positive $100 billion. Only with a $100 billion surplus on goods and services can you have a $200 billion deficit on the current account given that difference in earnings.