The Twin Deficit Hypothesis

Simply put the twin deficit hypothesis is the view that an economy running a fiscal budget deficit will also run a current account deficit. It stems from a national accounting equation which says that NX = S-I. We arrive at this point because Classical economists take S = Y-C-G, so we can arrange our national accounting equation of Y = C + I + G + NX to get the above NX = S – I. Where Y is national output (i.e. GDP), S is savings, C is consumption, I is investment, G is government spending and NX is net exports (exports minus imports). [...]