Introduction
The given economics study, questions the trade-off that exists between economic deficits and current account deficits. In this regard, current account deficits and GDP variables are used to establish how real income growth affects current account balance in Turkey. In order to establish the correlation between real income growth and current account balance in Turkey, ARDL model is use to examine the variables since all variables cannot be there fixed when the initial variations of the variables are taken. After taking first differencing the GDP variables become stationery and for this reason there is no purpose of differencing the first variable of current account deficit as the variable are already stationary. Hence, the correlation between economic growth and current account deficits can only examined by Pesaran et.al (2001) bound test approach.
In the long run, there is no any correlation that exists between economic growth and current account deficits. However in the short run there is a positive correlation that exists between current account deficits and economic growth in Turkey according to bound test approach. CA (current account deficit) is an imperative matter in both developing and developed countries (Fuat 2011). When a country like Turkey has a current account deficit this indicate the country is saving very little as compared to its investment, alternatively, is spending more money that it’s total GDP. In summary, when the current account deficits of Turkey is high it indicate the country has more liability against the countries it is trading with. According to the data provided when the real income of Turkey increases, the current account balance decreases implying that an increase in current account balance affects the economic growth of Turkey.
As a developing country the economic of Turkey has being growing over the years from 1990 up to date. Economic development of Turkey has resulted to rapid recovery of current account balance of that country and from the year 2002 to 2007 the CA of Turkey has been positive indicating an increase in the GDP of that country. An increase in GDP leads to higher incomes which in return results to more importation of commodities. Nonetheless, Turkish exports are independent of any significant increase in income from Turkish people who invests abroad (Fuat 2011). This is why economic growth of Turkey relies on imported immediate products such as capital and energy goods. In order to achieve sustainable economic growth, the country is required to import immediate products that will increase the productivity of resources. An increase in productivity of resources enhances investment which produces a surplus financial account that is connected with current account deficit.
In 2007 the GDP percentage growth rate of Turkey is negative (-7) while the current account to GNP ratio was 4.45 %. This indicates Turkey did no adopt an outwardly-oriented policy as a strategy of achieving sustainable economic growth on that year. If Turkey did adopt an outwardly-oriented policy it will not has obtained a negative GNP. In 2007, the CA/GDP ratio was reduced due to global financial crisis that rocked the global economy (Fuat 2011).
Predicted level of CA balance in 2012?
CA = b + b (GDP) +e t
Long-run coefficients using the ARDL (1,1): Dependent variable is GDP
In the long run the coefficient using ARDL equals to -1.48, therefore
CA/GDP = -1.48
CA/5.5 = -1.48
CA = 5.5*-1.48 = -8.14
Reference
Fuat Sekmen, Mustafa Calisir, (2011), Is There a Trade-off between Current-Account Deficits and Economic Growth? The Case of Turkey, © EuroJournals Publishing, Inc. 2011 http://www.eurojournals.com/IRJFE_62_14.pdf
