Is the U.S. current account deficit “abnormal”?
The economics profession has no consensus model to tell us, for a given economy, what the appropriate level of the current account balance is. At best, economists can agree on some general principles. I will emphasize only two. First, current account imbalances allow countries to smooth consumption over time, for example, in response to the ups and downs of the world price of a major export. Second, current account imbalances–which represent the difference between domestic savings and domestic investment–allow savings to be allocated to those parts of the world where they can be invested most productively. On the basis of these considerations, some analysts have argued that industrial countries should run current account surpluses and invest their abundant savings in developing countries, which, being labor-rich and capital-poor, would offer higher rates of return. However, examples of high or persistent current account deficits abound among industrialized economies, including Canada
