Macroeconomic Balances

Essay , 2011 , 8 Pages , Grade: 1.3

Economics - Monetary theory and policy

The following assignment compares the key variables of the accounting identity of five of the six biggest countries (measured by 2010 GDP) of the world. These countries are China, Germany, Japan, the United Kingdom (UK) and the United States.

The variables which will be examined empirically are private savings (S), public savings (T - G), investments (I) and current account balance (CA).

The period is stretched from 2000 to 2010. All values will be presented as a percentage to the GDP of each nation.

The following assignment compares the key variables of the accounting identity of five of the six biggest countries (measured by 2010 GDP) of the world. These countries are China, Germany, Japan, the United Kingdom (UK) and the United States. The accounting identity is defined as followed:

S + (T - G ) = 1 + CA

The variables which will be empirically examined are the private savings (S), the public savings (T - G), the investments (I) and the current account balance (CA). The period is stretched from 2000 to 2010. All values will be presented as a percentage to the GDP of each nation.

Exhibit 1: Development of the private savings from 2000 to 2010¹

illustration not visible in this excerpt

Exhibit 1 shows the private savings of households and businesses in comparison to the GDP. One can see that Chinas private savings are around half of the GDP, while the ones of the other countries vary around one fourth of their GDP’s.

One can also see that the private savings in five of the six examined countries stayed relatively stable since 2000. Only the private savings of China grew steadily from 40 % to almost 56 % of the GDP. There is a slight increase in the private savings when the financial crisis broke out in the year 2007 in the United States and the UK. This increase during that time from 2006 to 2009 can also be noticed for China.

It is interesting to see that the private savings of Germany, Japan, UK and United States move towards each other during the last 10 years. While the difference of the highest and the lowest value was 18.32 with a total variance of 126.16 in 2001, it was only 10.92 with a total variance of 24.92 in 2010 which is an indicator for people showing herding behaviour, as Authers (2010, p. 5) describes it.

As it was made a subject in the course, the consumption rate of China is only about 30% of their income. So it is obvious that the private savings have to be relatively high, because what else would they do with their money. In comparison to that, the US household consumption rate is around 74%, which implicates a low private savings rate in the United States.²

Exhibit 2: Development of the Public Savings from 2000 to 2010³

illustration not visible in this excerpt

Looking at the public savings shows that Japan’s public savings are on a high negative level in the beginning of the decade around -6 % and -8 %. Aside from the UK, the other countries increased their public savings in the years from 2003 to 2007. When the financial crises broke out in 2007, public savings of Japan, the UK and the United States declined to - 10 % to - 12 % until 2009 from their value of about -2 % in 2007. Only China and Germany managed to keep their public savings relatively steady but still declined by about 4 %. For all countries the negative public saving numbers mean that countries spend more money as they receive through taxes.

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¹ No value available for the United States in the year 2000. The value is therefore set to zero.

² Mentioned in class on October 3rd, 2011.

³ No value available for the United States in the year 2000. The value is therefore set to zero.

• College: San Diego State University
• Grade: 1.3
• Author: Tobias Kleinmann (Author)
• Publication Year: 2011
• Pages: 8
• Catalog Number: V189340
• ISBN (eBook): 9783656136293
• Language: English
• Tags: macroeconomic, balances