**4. Growth and current account balance**

The current account consists of two main items: the first is the foreign trade account showing the export and import of goods, and the second is the export and import of services, called "invisible trade" [19]. The current account deficit is less than the amount paid for goods produced and sold abroad to be consumed domestically, indicating that a country is making negative savings [20]. The relationship between the current account deficit and growth can be two-way relationship. Firstly the country with insufficient savings ratio or negative savings, the current account deficit can affect growth as investment spending is financed through the use of external savings. Second, as if income growth will increase demand for imported goods, the growth current account deficit may affect growth or may occur as a result of the growth rate itself.

The effect of the current account deficit on the growth rate is explained by providing investments with foreign savings if domestic savings are insufficient. It can be stated as follows if the savings are insufficient in an economy, investments are financed by borrowing of Foreign World Savings. In this context, as emphasized in both development economics and growth models, the source of growth is investment and the source of investment is savings ratio. If domestic savings are insufficient, it means that the difference can be met by using foreign sector savings and the current account deficit. The current account reflects the relationship between the financial markets and the goods and services markets in an economy. In the balance of payments, by definition, the current account deficit should be financed by capital account. In other words, the current account deficit may only be possible if necessary financing is provided in the capital account in the balance of payments.<sup>1</sup>

International flows of goods and capital are two sides of the coin and this can be explained by the national income accounting authority as follows [21]:

$$\mathbf{Y} = \mathbf{C} + \mathbf{I} + \mathbf{X} - \mathbf{M} \tag{5}$$

This identification shows the components of National Income (Y), under the assumption of equivalence of public revenues and expenses. Total revenue equals household consumption expenditures (C), private sector investment expenditures and the difference between exports (X) and imports (M), i.e. net exports. When necessary adjustments are made here, it can be shown that net exports or the current account balance in a broad sense are equal to the domestic savings investment difference.:

$$\mathbf{S} - \mathbf{I} = \mathbf{X} - \mathbf{M} \tag{6}$$

This equality shows how the current account balance is achieved (If s = I and X = M) in an economy that finances domestic investments with domestic savings. Accordingly, if domestic savings are insufficient to meet the investments (S < I),

<sup>1</sup> The balance of payments, which is a current variable showing the sum of current account and capital account, is always in balance in ex post analysis. Current account deficit is possible by increasing the capital Account by the same amount. In other words, there can be no current account deficit that does not have a counterpart in the capital account, that is, it is not financed. Therefore, the view that the current account balance is a trivial problem as long as it is financed is an erroneous point of view, which has been put forward to emphasize that the current account deficit is not a major problem [10].

## *Relationship between Economic Growth, Unemployment, Inflation and Current Account… DOI: http://dx.doi.org/10.5772/intechopen.93833*

there will be current account deficit and the investments for finance to savings are provided from abroad [17]. Within the framework of this identification, for example, a study covering the 1980s for the United States concluded that the current account deficit could be explained by the lack of savings. In other words, the level of domestic investment is being supported by flows of foreign saving. The study also emphasizes that external savings flows are equal to the negative value of the current account balance [22]. The many studies similarly have found that the current account deficit affects the growth rate in Turkey as well. For example, changes in the current account deficit were shown to affect economic growth using the structured VAR method by evaluating the quarterly data in 2002–2014 [23]. The relationship between the current account deficit and growth in Turkey is closely related to the need for Energy (oil), investment goods and intermediate imports, as well as the insufficient savings rate. Turkey's dependence on exports in terms of oil and investment goods is an important factor affecting the reduction of the current account deficit. The realization of investments and therefore growth is linked to the current account deficit through the increase in imports. The consumption expenditures depend mainly on income in the Keynesian approach. Since income growth will affect demand for both domestic and imported goods, it will put a negative pressure on the current account. Thus, in this case, the rate of growth is the independent variable and the current account is the dependent variable, which varies accordingly. The relationship between these two variables is oriented from growth rate to current account balance. The import expenditure represented by M is an increasing function of income in the equality 6. The volume of imports consists of two components such as autonomous and revenue-dependent in the Keynesian model. Hence the total amount of imports varies in the right direction with income depending on the marginal import trend considered constant [24]. İt is observed that the mutual causality relationship is towards growth to current account deficit.

**Figure 3** shows the ratio of the current account to GDP ratio and the growth rate in Turkey over the last 20 years. In the period examined, it is observed that the current account deficit increases during the expansion process and the current account deficit decreases during the contraction periods in Turkey. In addition, the current account balance has been continuously negative except the years 2001 and 2019. Especially when the economy experienced a contraction of close to 6% in 2002, the current account balance was realized at close to 2%. Similar to when the growth ratio reached its highest value (11.1%) the ratio growth to current account to GDP value reached % 8.9 in 2011, when the growth rate was a record it can be considered as an indication of how closely related the growth rate and the current account deficit are in Turkey.

**Figure 3.** *Current account balance / GDP and growth rate (1999–2019). Source: OECD.*

growth model with policies based on production, providing employment, focused

The current account consists of two main items: the first is the foreign trade account showing the export and import of goods, and the second is the export and import of services, called "invisible trade" [19]. The current account deficit is less than the amount paid for goods produced and sold abroad to be consumed domestically, indicating that a country is making negative savings [20]. The relationship between the current account deficit and growth can be two-way relationship. Firstly the country with insufficient savings ratio or negative savings, the current account deficit can affect growth as investment spending is financed through the use of external savings. Second, as if income growth will increase demand for imported goods, the growth current account deficit may affect growth or may occur

The effect of the current account deficit on the growth rate is explained by providing investments with foreign savings if domestic savings are insufficient. It can be stated as follows if the savings are insufficient in an economy, investments are financed by borrowing of Foreign World Savings. In this context, as emphasized in both development economics and growth models, the source of growth is investment and the source of investment is savings ratio. If domestic savings are insufficient, it means that the difference can be met by using foreign sector savings and the current account deficit. The current account reflects the relationship between the financial markets and the goods and services markets in an economy. In the balance of payments, by definition, the current account deficit should be financed by capital account. In other words, the current account deficit may only be possible if necessary financing is provided in the capital account in the balance of payments.<sup>1</sup> International flows of goods and capital are two sides of the coin and this can be

explained by the national income accounting authority as follows [21]:

This identification shows the components of National Income (Y), under the assumption of equivalence of public revenues and expenses. Total revenue equals household consumption expenditures (C), private sector investment expenditures and the difference between exports (X) and imports (M), i.e. net exports. When necessary adjustments are made here, it can be shown that net exports or the current account balance in a broad sense are equal to the domestic savings investment difference.:

This equality shows how the current account balance is achieved (If s = I and X = M) in an economy that finances domestic investments with domestic savings. Accordingly, if domestic savings are insufficient to meet the investments (S < I),

<sup>1</sup> The balance of payments, which is a current variable showing the sum of current account and capital account, is always in balance in ex post analysis. Current account deficit is possible by increasing the capital Account by the same amount. In other words, there can be no current account deficit that does not have a counterpart in the capital account, that is, it is not financed. Therefore, the view that the current account balance is a trivial problem as long as it is financed is an erroneous point of view, which has been put forward to emphasize that the current account deficit is not a major problem [10].

Y ¼ C þ I þ X � M (5)

S � I ¼ X � M (6)

on high value added products and reducing external dependence [17].

*Linear and Non-Linear Financial Econometrics - Theory and Practice*

**4. Growth and current account balance**

as a result of the growth rate itself.

**292**

To summarize it is observed that while growth accelerated when the current account balance in Turkey gave a deficit. The growth slowed when the current account balance gave a surplus. In this context, the ratio of the current account deficit to GDP was 4.7% in 2017, while the same rate rose to 1.1% in 2019. In the same period, the growth rate started to decrease and reached 0.9% from 7.4%.
