What is the equilibrium of GDP

European debt crisis

Till van Treeck

Till van Treeck is Professor of Social Economics at the University of Duisburg-Essen. He studied politics and economics in Lille, Münster and Leeds. His work focuses on income distribution from a macroeconomic perspective, economic policy and (socio) economic education.

On the basis of the national accounts, the external trade relations of an economy can be viewed from two sides.
Spanish GDP increases when Germans spend their holidays on Mallorca. Image: Long queues at the eastern end of the Formentor peninsula. (& copy picture alliance / dpa-Zentralbild)

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The external contribution in the macroeconomic cycle

The so-called external contribution, also known as net exports, is defined in the GDP usage calculation as the difference between exports and imports of goods and services:

GDP = private consumption and investment + government consumption and investment + exports - imports.

When a country increases its exports, all other things being equal, it also increases its GDP. For example, if a company based in Germany manufactures an additional washing machine in Germany and sells it to Spain, German GDP increases and thus contributes to employment in Germany because additional hours are required to produce the additional washing machine. Conversely, the Spanish GDP increases when German vacationers spend money on a hotel room in Mallorca. In this case, Spain exports a tourism service to Germany, which in turn enables the employment of workers in the tourism industry in Spain. Conversely, a country's GDP falls if - under otherwise unchanged conditions - imports increase. For example, if Spanish household spending on new cars remains constant from one year to the next, but spending on cars produced in Spain falls in the second year, while spending on cars imported from Germany increases, then Spanish GDP falls in the second year Compared to the first year. Accordingly, employment in the automotive industry is falling in Spain, while it is increasing in Germany.

Worldwide, the difference between exports and imports is always exactly zero, because the exports of one country always have to be the imports of another country.

The current account in the macroeconomic cycle

On the other hand, the external balance is closely linked to the so-called current account, which can be derived from the financial balances of the domestic sectors. When government and private sector spending on consumption and investment in a country is less than government and private sector incomes, i.e. when government and private sector save more than they invest, there is a current account surplus:

Financial balance of households + financial balance of private companies + financial balance of government = current account balance.

A country's current account surplus must always be accompanied by a current account deficit in at least one other country. Because the earth's current account balance is zero.

In many countries, the current account balance is roughly equivalent to net exports. The current account also includes the balance of earned income and property income and the balance of various transfers. A current account surplus means that the home country has to pay less (for imports, income and other transfers) to abroad than it receives from abroad (for exports, income and other transfers). Conversely, a current account deficit means that the home country has to pay more (for imports, income and other transfers) to abroad than it receives from abroad (for exports, income and other transfers).

External contribution and current account in various schools of thought

Neoclassical Oriented economists typically argue that high foreign trade surpluses or deficits do not necessarily represent a problem, but can represent a desirable equilibrium phenomenon. For example, countries with a relatively low level of economic development can be expected to have current account deficits because they attract foreign donors with investment opportunities. Since the modernization potential is higher than that in more developed economies, the potential returns are more attractive for investors. For example, Michael Hüther argues in his contribution to the debate: "If Germany saves, it creates potential for investment financing in other countries, so that opportunities for more growth and employment arise there." Rather, it criticizes countries with current account deficits that have not used capital imports sufficiently for productivity-increasing investments, but for consumption (e.g. for too large a state apparatus).

Out keynesian On the other hand, high export or current account surpluses are often interpreted as a sign of insufficient domestic demand. As a result, the export surplus countries only succeed in keeping their unemployment low because other countries import their products on a large scale and partly financed by loans. A typical Keynesian demand is that countries with export surpluses should also strengthen domestic demand in their own interest, for example through higher government spending and possibly rising government budget deficits, in order to make themselves less dependent on possible debt crises abroad, as Thomas Fricke calls for in his interview . If, on the other hand, all or at least many countries strive for export surpluses and tighten their belts domestically, according to the Keynesian perspective, there is a threat of weak international demand because not all countries can simultaneously boost their demand through export surpluses. Keynesian economists therefore see a need for economic policy action both in the case of high current account deficits and high current account surpluses.

The current account in the (reformed) Stability and Growth Pact (SGP)

Before the euro crisis, the SWP only provided sanctions in the event of government budget deficits over three percent of GDP. However, countries like Spain and Ireland also got into the crisis, which up until immediately before the crisis had always complied with the SGP and even had government surpluses to show. Before the crisis, these countries were characterized by high current account deficits because private households and companies spent significantly more than they had in terms of income. As a result, they built up ever higher private debts, which ultimately led to the crisis. In the course of the crisis, the national debt in these countries rose sharply because the states took over part of the private debt (key word bank bailout) and because the economic downturn caused government income from taxes and duties to decline and expenses for transfer payments such as unemployment benefits increased.

Since the reform of the SGP in 2011, current account deficits of more than four percent of GDP can now also be sanctioned. Current account surpluses are considered problematic from a level of six percent of GDP, but unlike deficits, they should not be sanctioned.

Didactic applications on the topic

On the empirical illustration I: Savings, investments and financial balances in the open economy (Germany 2015)

To the empirical illustration II: External contribution, current account balance and state budget using the example of Spain