Abstract

Observations on the Normative Approach to Interpreting Net Balance on Current Account

The normative approach to interpreting net balances on current account by Issing and Masuch is based on a simple analytical framework that is subject to the limitations mentioned below: (1) It extrapolates the decision-making logic of the individual’s intertemporal choice as a consumer to the level of the national economy without taking account of the resultant aggregative and structural effects. (2) It does not have to take into consideration an exchange rate and it assumes that net surpluses on current account – as a result of increased domestic savings – would be absorbed by increased investments abroad. By contrast, this paper shows that net surpluses on current account generate market signals that lead to an expanding domestic investment activity. (3) Foreign assets acquired by means of current balance surpluses do not imply growth in real wealth. (4) Even if domestic labour supply should contract in the Federal Republic of Germany, it would not appear to be reasonable to adjust the production potential to a net transfer of resources abroad in order to form net foreign assets. Priority must be given to domestic goods supply and productive investments at home