The UK and the US have long run large trade deficits. Such a
deficit is often thought to mean that a country is, like a
household, "living beyond its means". How true is
this?
First we need to rehearse some definitions.
The trade balance is often loosely used to describe the current
account balance. The latter is, in fact, a broader measure,
comprising trade in goods and services; net international income,
for instance from dividends and rents; and net payments by
governments and international organisations, such as contributions
to the EU and overseas aid.
The flip side of the current account is the capital account,
which measures net capital outflows. The current account and
capital accounts are exactly equal – in this sense the
balance of payments always balances.
