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Sustainable Deficit - Essay Example

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In considering whether the U.S. current account deficit is sustainable, many factors must be examined. The amount of spending on foreign goods and foreign investment affect trade deficit or surplus which, in theory, directly affects the current account. …
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Sustainable Deficit
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Sustainable Deficit

Download file to see previous pages... Productivity affects the current account when investment occurs in order to increase future output. According to Economic Review, First Quarter 2001, “economic theory predicts that if a country experiences an investment boom as a result of increased productivity, while its trading partners do not, its current account deficit should widen.” Catherine Mann suggests that current account deficit can indicate that a nation is “living beyond its means,” or that a country is attracting global foreign investment due to higher returns and less risk. In the Economic Review article, Jill Holman defines current account as “the change Over time in the sum of three components: the trade account, the income account, and The transfer account.” Trade account is the difference in value of imports and exports. Income account is the difference in income payments made to foreigners versus payments Received from foreigners. Transfer account is the difference in value of private and government payments to and from other countries. The explanation on page 8 of the Economic Review summarizes a trade deficit that must be financed by borrowing from abroad. How this borrowing affect the U.S. current account deficit is more complicated than the trade deficit. The U.S. trade deficit has been widening since the late 1990s as we demand and consume more foreign goods. As we borrow from abroad, we must also make payments to foreign investors. Overall, deficits in both accounts are the result of U.S. participation in a global marketplace. ...Download file to see next pagesRead More
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