Prepared by Anastassios Gagales.
Unless otherwise indicated, all ratios are calculated with respect to nominal GDP.
The recovery of the current account in the 1980s has been reviewed in SM/95/62.
The quality of trade statistics has deteriorated since the replacement in 1993 of the old custom-based system of collecting information on intra-EU trade flows. There have also been large discrepancies between trade statistics and other information on trade (e.g., balance of payments statistics, VAT revenues and other countries’ exports). For instance, Germany’s industrial imports from Denmark fell by more than 30 percent in 1993 whereas Danish exports to Germany fell by only 3 percent. Investigations on these discrepancies are ongoing.
The decomposition can be written as (X-M)=(x-m)+[(Px-P).x-(Pm-P).m]/Y where X and M stand for exports and imports measured in percent of nominal GDP; x and m denote exports and imports at constant prices in percent of real GDP; Px, Pm and P denote respectively the deflators of exports, imports and GDP. The bracketed term captures the terms of trade effect; its size depends on the change in the relative price of exports/imports (cumulatively relative to the base year) and the extent to which the country is a net exporter (net exporters benefit more from a terms-of-trade improvement).
Large Danish enterprises moved production lines abroad in the early 1990s and smaller ones started to follow suit in the mid 1990s. This should show in the external current account as reduced exports and higher net factor income.
Lumping together goods and nonfactor services did not alter significantly the econometric estimates. This probably reflects the fact that non-factor services account for 20 percent of total trade and their share has been fairly stable when calculated at current prices (at constant prices it declined by 2 percentage points in the past decade).
The import content was set at 20 percent of total exports based on non-sample information. Attempts at directly estimating this coefficient gave implausible estimates.
Special factors are not entirely independent from the output gap or the real effective exchange rate. For example, the export surge related to the German unification affected the level of economic activity and, probably, the real effective exchange rate. Such secondary effects were not taken into account in the calculations.
The temporary effect was estimated by smoothing (ω-ϖ) MG/GDP where ω,ϖ denote the actual and “normal/sustainable” share of Danish exports in the German market, MG stands for total German imports, and GDP for nominal Danish GDP.
The cyclical components of trade flows are assumed proportional to the output gaps. This abstracts from that the different components of demand differ in their import content and, hence, in their impact on the current account: a positive domestic output gap driven by buoyant exports tends to strengthen the current account whereas one driven by strong domestic demand tends to worsen it. Similarly, the import compression in crisis-stricken emerging market economies in 1997-98 may have biased downward the foreign cyclical effect.
The calculations are based on an estimated unit semi-elasticity of the savings rate with respect to the real after-tax interest rate. The real after-tax interest rate is given by r=(l+R(l-t))/(l+i)-l where R, t, and i denote respectively the nominal interest rate, the marginal tax rate applying to deductible interest expenses, and inflation. With nominal borrowing rate and inflation at 7 percent and 2 percent, the reduction of the marginal tax rate from 46.4 percent to 32.2 percent raises the real borrowing rate from 1.7 percent to 2.7 percent. Ministry of Finance, Finansredegorelse 97, November 1997 and Okonomisk Oversigt, May 1999.