Appendix A1: Link between the current account, domestic saving and investment[28] [29]
In an open economy, total spending by residents comprises the absorption of domestically produced goods and services and goods and services produced abroad, where total absorption (A) consists of consumption expenditure (C), government expenditure (G) and private gross fixed capital formation (GFCF). The difference between residents’ spending on domestically produced goods and services and total absorption is imports (M). Exports (X) are foreign spending on domestically produced goods and services. If the trade balance is in deficit, i.e. imports exceed exports, absorption (A) exceeds the gross domestic product (GDP), i.e.
(A1.1) 
where A = G + C + GFCF.
The current account balance (CAB) is defined as the sum of the trade balance (X – M), net income paid abroad (NIPA) and net transfers paid abroad (NTPA)
(A1.2)
where net income paid abroad (NIPA) plus consumption of fixed capital (CFC) is the difference between the gross domestic product (GDP) and gross national income (GNI).
The link to saving and investment is as follows. Gross domestic saving (GDS), which consists of household, business and government saving, is the difference between GDP and consumption plus government expenditure (C + G)
(A1.3)
Gross fixed capital formation (GFCF) is the difference between total absorption (A) and consumption and government expenditure (C + G)
(A1.4)
Using equation (A1.1) this implies
(A1.5)
Equation (A1.5) hence implies that when the trade balance is in deficit, imports exceed exports and gross fixed capital formation exceeds gross domestic saving. Moreover, it can be shown that the difference between net national saving (NNS) and investment (I) (gross fixed capital formation less consumption of fixed capital) is equal to the current account balance
(A1.6)
where net national saving (NNS) is the difference between net national disposable income (NNDI) and consumption and government expenditure, and net national disposable income (NNDI) is the difference between gross national income (GNI) less net transfers paid abroad (NTPA).[30]
In an open economy, the difference between net national saving and domestic investment is the current account balance. When the current account balance is in deficit, the excess of investment over domestic saving is financed by foreign funds or net capital inflows as measured by net foreign investment or the capital account surplus. In other words, an economy with access to foreign capital can augment its capital stock through foreign investment.
The current account balance, by definition, corresponds to the change in net foreign assets (NFA)
(A1.7)
| GDP | = | Gross domestic product; income earned from production in New Zealand by New Zealand firms and foreign firms operating in New Zealand |
| C | = | Consumption expenditure |
| GFCF | = | Gross fixed capital formation |
| I | = | Investment; GFCF less consumption of fixed capital (CFC) |
| G | = | Government expenditure (including both consumption and investment) |
| X | = | Exports of goods and services to the rest of the world |
| M | = | Imports of goods and services from the rest of the world |
| A | = | Absorption or gross national expenditure (GNE); sum of C, GFCF and G |
| GNI | = | Gross national income; previously referred to as gross national product (GNP); GDP less net income paid abroad (NIPA) and consumption of fixed capital (CFC) |
| NNI | = | Net national income; GNI minus consumption of fixed capital (CFP) |
| NNDI | = | Net national disposable income; GNI less net transfers paid abroad (NTPA) |
| NNS | = | Net national saving; NNDI less C and G |
| GDS | = | Gross domestic saving; GDP less C and G |
Notes
- [28]For more details see Makin (2000).
- [29]The notation is summarised in Table A1.1.
- [30]This follows from GDS – GFCF – NIPA – NTPA = GDP – C – G – GFCF – NIPA – NTPA = GNI + NIPA + CFC – C – G – GFCF – NIPA – NTPA = NNDI + CFC – C – G – GFCF = (NNDI – C – G) – (GFCF – CFC) = NNS – I = X – M – NIPA – NTPA = CAB for CAB < 0.
