The current account mainly consists of the difference between exports and imports of goods and services, that is, net exports. A positive current account means that the economy as a whole produces more than is used. This surplus represents savings used to invest in foreign assets rather than domestic assets. A surplus on the current account thus means a situation where domestic saving exceeds domestic investment. 25  Unfortunately, there are no really long time series for the trade-weighted development of the krona, partly because of problems with breaks in the time series due to the world wars regarding, for instance, the nominal exchange rate and CPI in Germany, which has historically been Sweden’s most important trading partner. 26  The most common explanation for this is what is known as the Balassa-Samuelson effect. Put simply, this effect arises because countries with high growth tend to have high productivity growth in the goods sector, which results in price increases in the service sector, where productivity growth is lower. Thus, countries with high growth typically experience a strengthening of their real exchange rate. For a description of this effect with empirical results, see Lothian and Taylor (2008). BIS Review 3/2010  11  Figure 6 Swedish GDP in relation to abroad Index: 1970=100  Note. The series in the Figure shows the ratio between Sweden’s GDP and the TCW-weighted GDP for countries abroad. The broken line represents the Riksbank’s forecast. Sources: National sources, Statistics Sweden and the Riksbank.
It is this tradeweighted krona rate that the Riksbank tries to analyse and forecast. If one looks at the period with a floating exchange rate (since November 1992), one can draw the conclusion that the nominal and real exchange rates are strongly correlated. This is because exchange rates, which translate prices into a common currency, change quickly, while price levels change slowly. Nominal exchange rates are determined at the trading counters daily, while it takes time to change prices. Figure 4 Nominal and real TCW-weighted exchange rates Index, 18 November 1992=100  Note. Broken lines represent the Riksbank’s forecasts. The real exchange rate has been calculated using Swedish and TCW-weighted CPI. Sources: Statistics Sweden and the Riksbank. How do we compare the impact from the nominal exchange rate on inflation, which I took up earlier, with Figure 4, which shows a strong correlation between the nominal and real exchange rates? According to the earlier example, only around 15 per cent of a nominal exchange rate change “spills over” into domestic inflation. This means that 85 per cent of the nominal exchange rate change does not have any effect on inflation and that the real exchange rate is thus affected by 85 per cent of the change in the nominal exchange rate. There is thus a strong, but not complete, correlation in the short term between the nominal and real exchange rates.