Question

What are the reasons for the persistent US current account deficit since 1983? and

What are the implications of a long-term current account deficit on the economy?

Answer 1

The current account balance is the most comprehensive international transaction measure of the nation. It has three component balances: balance of goods and services, balance of investment income, and net one-sided transfers. These are all transactions that are considered to be closely linked to current production, consumption, and revenue. The scale of the current account deficit for the United States is essentially the refection of a similarly large surplus in goods and services. The current account (trade) deficit in the United States grew steadily between 1992 and 2006. Nevertheless, in 2007, the trade imbalance dropped from $803.5 billion in 2006 to $726.6 billion. The trade deficit continued to decline in 2008 and 2009, hitting $706.1 billion, respectively, and $419.9 billion. Strong export sales and a gradual weakening of import purchases represented these declines. A major weakening of the dollar between 2002 and 2007 made U.S. exports more attractive to foreign buyers and less appealing to American consumers. However, since 2006, the United States ' economic growth has slowed relative to that of its major trading partners.

U.S. trade deficit size is ultimately rooted in domestic and international macroeconomic conditions. Saving the U.S. falls short of what the U.S. investment seeks to finance. Most foreign economies are in the opposite situation, with domestic savings exceeding investment opportunities. This will continue to be reconciled by global flows of resources. The deficit in domestic savings compared to investment tends to result in relatively large foreign savings (capital) inflows, seeks to maximize returns and, in effect, the savings inflow makes it possible to achieve a higher level of investment. A net capital (savings) inflow for the United States also contributes to a similarly large net inflow of foreign goods a trade deficit. Savings and spending dropped in 2007 and 2008, but investment fell more in a declining economy, allowing the trade deficit to reduce.

A trade deficit and the inflows of capital that trigger it can be beneficial on balance. It offers economic benefits and costs, and the latter can outweigh the latter. Standard economic theory suggests that trade deficits and capital inflows can be a tool for expanding trade profits, where lending and borrowing between nations can lead to a more effective investment distribution and a preferred consumption pattern over time.

The claim that trade deficits are positive on balance is most probable when an increase in domestic investment is funded by the accompanying inflow of foreign capital. A higher investment rate increases the productive capital stock of the economy. Workers are more competitive with more resources, resulting in higher production and higher wages. The increased production would most likely be large enough to make foreign debt-service payments and raise the standard of living at home.

Many analysts argue that the current account (trade) deficit and the resulting capital inflow are not a problem by themselves, but signs of a problem a low national saving rate.18 The saving-investment imbalance faced by the U.S. economy over the past decade is not the product of growing domestic investment compared to the domestic saving rate as in the 1990s; rather, it is the result of increasing domestic investment. In this view, foreign capital inflow is funding higher household and government consumption.

Trade deficits are most often a way to increase the amount of goods and services available to domestic consumers, actually allowing the nation to invest above current domestic production by importing foreign output. In order to meet existing domestic demand, both domestic and foreign production are used. With strong demand in an economy operating near or at its productive capacity, and unable to produce a short-term expansion of that productive capacity that is sufficient to meet that demand, it is possible for domestic industries to operate at full capacity, even as significant inflows of similar or related foreign products are also present.