As well as the balance of payments, there are other methods of considering the current account.
The international investment position
The balance of payments statement is closely linked to the statement on international investment position (IIP), the other major statistical record of New Zealand’s financial relationship with the rest of the world.
While the balance of payments collates the flows of funds from and to New Zealand residents each quarter, the IIP describes the value of assets and liabilities held by New Zealanders overseas and by foreign residents in New Zealand at the end of a financial quarter.
The net investment position at the end of a quarter is calculated by adding the balance on the financial account for a given quarter to the net investment position at the beginning of the quarter. In addition, there is some lesser adjustment caused by changes in prices and exchange rates, which influence the value of assets and liabilities.
New Zealand has had a high level of international borrowing for much of its history. In the 1975 election campaign National Party leader Robert Muldoon created a high level of public anxiety about the country’s debt, which had increased fast as a result of the rise in oil prices and the decline in New Zealand’s terms of trade. Muldoon’s ploy was successful, and he became prime minister. However, New Zealand continued to borrow money to finance the gap between overseas income and payments.
A current account surplus in any period reduces New Zealand’s total net foreign debt, and improves its international investment position. However, New Zealand usually has a current account deficit, increasing the country’s total net foreign debt.
The net investment position at any point in time can be considered as the sum of all past current account balances.
The savings investment link
In a closed economy – one that has no trade or financial links with the rest of the world – investment would be the same as the economy’s gross savings. An open economy such as New Zealand’s, which has international financial links, may boost investment without increasing domestic savings by borrowing on international capital markets. This produces a deficit on the current account. In this sense, a current account balance is simply the difference between an open economy’s gross savings and investment.