contributed to the u. s. trade deficit are not unrelated and may be part of a broader evolution of the global economy. the same types of liberalization and innovation that have improved financial intermediation within the united states, for example, have likely been instrumental in reducing home bias and increasing intermediation among countries. improvements in financial markets, both at home and abroad, may have amplified the effects on the u. s. current account of other developments i have discussed, including the u. s. productivity surge and the perceived weakening of foreign investment opportunities. it is even possible that the expansion of the u. s. budget deficit would have been smaller had policymakers perceived global financial markets to be less willing to finance the gap. the view that the current account deficit stems from economic developments that are varied and yet intertwined has important implications for how the deficit will be corrected. such a view suggests to me, first, that government policies such as budget - cutting or encouragement of private saving are unlikely, by themselves, to correct the current account deficit, much as they might be desirable for other reasons. such policies probably do not address all or even most of the root causes of the current account deficit. however, the fact that i have deemphasized government policy as the source of the adjustment process does not mean that the public sector has no role to play. reducing our budget deficit can ease the adjustment process by releasing resources that can be channeled into higher net exports, so that a reduced trade deficit does not require a curtailment of investment. the public sector in several nations has an important role in creating flexible markets for products, labor and financial assets. appropriate macroeconomic and structural policies in many economies can contribute to the privatesector adjustment process by fostering an environment of innovation, increased productivity and morerapid growth of domestic demand. recognizing the role for pubic policy, the group of seven industrial nations recently stated that vigorous action is needed to address global imbalances and foster growth. the primary impetus toward adjustment of the u. s. current account deficit, when it occurs, likely will come from private markets. here, however, the multiplicity of factors underlying the large u. s. current account deficit raises questions about how that adjustment will come about. some of the developments that may have supported the expansion of the u. s. current account deficit might reverse themselves - foreign domestic demand could recover, u. s. private saving rates could rise. and some of the

##izing the current account before getting to these explanations, however, i'd like to take a few moments to clear up what - for some, at least - has been a prominent source of confusion. at least three approaches characterize the current account balance, and each of them shines the spotlight on different factors that may be influential. perhaps most commonly, the current account balance is portrayed as the difference between a nation's exports, broadly defined, and its imports. from this perspective, the determinants of the current account balance are roughly the same as the determinants of the trade balance : exchange rates, prices, and incomes at home and abroad. accordingly, the widening of the u. s. current account deficit is frequently attributed to the strengthening of the dollar since the mid - 1990s, which led u. s. imports to be cheaper measured in dollars and u. s. exports to be more expensive in foreign currency. according to a second perspective, the current account balance is defined as the difference between a nation's saving and its investment. this definition highlights the decline in the ratio of national saving to gdp over the past ten years, even as investment rates have moved up a bit on balance, as the central cause of the widening of the u. s. current account deficit. finally, because any excess of national spending over income must be financed by foreigners, the current account deficit is equivalent to the net inflow of capital from abroad. this approach points to the surge of capital inflows into our economy as the key development underlying the emergence of the large external deficit. these three approaches - the trade balance, the saving - investment balance, and net capital inflows might, at first blush, appear to attribute the emergence of the large u. s. current account deficit to highly distinct factors. in reality, however, these approaches are merely three alternative means of characterizing the outcomes of the same underlying, fundamental developments. to see this more concretely, consider, for example, the effects of a rise in investor perceptions of the rate of return on investment in the united states. the rise will likely attract foreign capital inflows. it may also lead to a strengthening of the dollar, thereby weakening exports and strengthening imports. finally, through various channels, the rise in the perceived rate of return may boost the investment rate and lower the saving rate. in this example, the fundamental shock causing the current account deficit to widen is the change in investor expectations. the other