following accounting identity : the public sector balance + the private sector balance = the current account balance right now the identity holds as roughly : – 10 percent of gdp public sector balance + 7 percent of gdp private sector balance = – 3 percent of gdp current account balance. 5 if the public sector balance must over time move from around – 10 percent to around – 3 percent to stabilize the federal debt - to - gdp ratio at tolerable levels, then the private sector balance and the current account balance must move by roughly 7 percentage points of gdp to take up the slack. assuming that the consumption share of gdp still needs to fall over the medium term, the adjustment in the u. s. private balance will have to occur primarily in terms of rising residential or business fixed investment. there does seem to be room for business investment to expand significantly when firms become more confident in the economic outlook, provided that the united states remains a competitive location for investment. but residential investment is unlikely to climb very much for some time given the chronic overhang of unsold homes. if these two sectors cannot take up all the slack created by necessary fiscal retrenchment in the years ahead – as seems likely – then the u. s. trade balance will need to improve as well. this implies that emes will no longer be able to rely on expanding u. s. demand as a key driver of their own economic growth. of course, this is not just an issue of u. s. and eme adjustment. adjustments will be required in other industrialized countries, too – and not just the deficit countries. there has to be recognition on all sides that global rebalancing in terms of the composition of activity and growth and in terms of global capital flows is necessary. fortunately, this is not a zero - sum game : it is in the interests of all sides. however, it is still very difficult to accomplish because it is not in the short - term interests of some interest groups in many nations. this means that there are likely to be considerable political obstacles to adjustment in many parts of the global economy. in this process, the united states needs to show leadership in contributing to a smooth adjustment. in this regard, i think there are a number of actions that the united states can take – unilaterally and in its own interest – that will make this rebalancing process easier and less prone to disruption. as discussed earlier, no issue is more important than a credible commitment for getting our

the riksbank ’ s calculations of potential gdp resource utilisation can be measured in several different ways. here, i will demonstrate how we, at the riksbank, calculate measurements of resource utilisation based on gdp and potential gdp, as well as hours worked and potential hours worked. potential gdp refers to the level of gdp that is consistent with a use of the available resources that is sustainable in the long term and that does not push up inflation. if gdp exceeds the potential level, then resource utilisation is high – and vice versa. we call the difference between actual and potential gdp the gdp gap. 6 when resource utilisation is normal, gdp is equal to potential bnp, and the gdp gap is equal to zero. consequently, potential gdp does not refer to the highest level gdp may reach over the short term. in figure 1, the trend development of gdp is represented by a hodrick - prescott trend ( hp trend ). an hp trend is something between a linear trend and the actual development of gdp. the hp trend is a common and often fairly good measure of the underlying long - term development in gdp during normal cyclical fluctuations. but the hp trend is not good at estimating the underlying development of gdp at the end of a time series and it gives no guidance as to why output deviates from its trend level. the production function approach on the other hand, our ability to analyse why output deviates from its long - term level can be improved if a production function ( pf ) approach is used. this is a common technique used by international organisations such as the imf and the oecd. the riksbank has used such an approach since 2010. 7 a production function shows how output depends on production factors and technological level. in the most common case, we may consider that output ( y ) depends on the number of hours worked ( h ), the capital stock ( k ) and total factor productivity ( tfp ). the level of tfp determines how much output is derived from a given amount of hours and capital. 8 tfp can thus be seen as a measure of the level of technology. by specifying a form for the production function, the following breakdown is obtained : 9 the wage share in the economy is usually about two - thirds, which is why hours are considered to stand for two - thirds of the production factors ( ) and capital for the ). the contribution of each factor to output can then be calculated