The largest and richest world economy belongs to the United States (“North America,” 2011). Interestingly, this same monstrous economy also holds the title for the largest current account deficit. The U.S. current account deficit is funded from net capital inflows from abroad and has continued to grow throughout the last two decades (Holman, 2001). Economists in the early part of this century theorized that this huge U.S. external deficit was sustainable because it would gradually correct itself and in a few short years, the deficit would narrow, but this was not the case (Holman, 2001). The United States, continually fueled by foreign investments, became a net debtor nation. The unique position that the United States holds in the world economy allows the country to run persistent external deficits, but this is not a safe practice. In order to be safe from sudden foreign shifts in confidence, the United States must strive to minimize the deficit by formulating a strategic plan to prioritize expenses and avoid perpetual damage.
The United States’ current account deficit is a result of the nation importing more than it is exporting or consuming more than it is producing (Ott, n.d.). The current account is a subaccount of the balance of payments, which is a method of tracking economic interactions with other countries (Carbaugh, 2011). The other subaccount of the balance of payments is the capital and financial account. A deficit in the current account means that there is a surplus in the capital and financial account, and vice versa. A country is considered a net debtor when the money in the current account is less than that of the capital and financial account. Furthermore, this net debtor label means that foreig...
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North America: United States. (2011, June 6). CIA - The World Factbook. Retrieved June 9, 2011, from https://www.cia.gov/library/publications/the-world-factbook/geos/us.html
Ott, M. (n.d.). International Capital Flows. Library of Economics and Liberty. Retrieved June 9, 2011, from http://www.econlib.org/library/Enc/InternationalCapitalFlows.html
Walker, D. (2008). The United States' Four Deficits. Brown Journal of World Affairs, 14(2), 165-173.
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Many argue that Reagan “enacted irresponsible tax giveaways for the rich…[starving] the federal government of revenue [which] led to unprecedented deficits.” There is no doubt that “today’s budget deficits [can] impoverish our descendants.”1
Mexico was running an increasing current account deficit from US$7.5 billion in 1990 to US$23.4 billion in 1993. This indicates an excess of private investing over private savings. However, the country was able to maintain an improving fiscal account from US$3.6 billion deficit in 1990 to US$0.7 billion surplus in 1993. The deficit in current account was financed through capital funds from abroad resulting the capital account to increase from US$8.4 billion in 1990 to US$33.8 billion in 1993.
The U.S. trade deficit has risen more or less steadily since 1992. In the second quarter of 2004, the trade deficit relative to GDP surpassed the 5 percent mark for the first time. Many economists already considered trade deficits above 4 percent of GDP dangerously high. The fear is that continued growth in this external imbalance of the U.S. economy will ultimately spook overseas investors. http://www.americanprogress.org/issues/2004/09/b193700.html
The US has been in and out of debt countless times throughout history, going as far back as the Civil War. However, debt did not become a truly relevant problem until much later, in the 1980s (Budget Deficits). Up to that point, large budget deficits were generally only allowed during wartime, but this pattern ended after the Great Depression. Roosevelt’s New Deal meant that the government spent much more than it previously did, even after the economy improved (Budget De...
A large increase in government debt occurred during Ronald Reagan’s presidency in the 1980’s. Ronald Reagan was dedicated to decreasing taxes a...
Gaynor Ellis, Elisabeth, and Anthony Esler. ""New Economic Thinking"" World History: The Modern Era. Prentice Hall. 186. Print.
U.S Federal Deficit and Debts:Understanding the history and context. (2011, November 1). Utah Foundation. Retrieved January 25, 2014, from http://www.utahfoundation.org/img/pdfs/rr7
Heilbroner, Robert. "The Economic Problem." The Making of the Economic Society. Englewood Cliffs: Prentice Hall, 1993. pp. 1-15
Since in the 1980’s, one of the most persistent challenges to The United States’ economy and her policy makers has been the deficit of the U.S. current account. A current account is made up of four separate categories, the combined balance of which results in a surplus or deficit. The four categories are: The Merchandise Trade Account, Services, Factor Income, and Unilateral Transfers. Each account either has a surplus or a deficit, depending on whether money is flowing into or out of a particular country. The U.S. Trade Account deficit currently is the largest contributor to the U.S. Current Account deficit. This deficit is comprised of what United States citizens, businesses and government borrow from their foreign counterparts. It seems counter intuitive that one of the wealthiest developed countries in the world would need, or even want, to borrow from its trading partners. This paper will attempt to summarize the reasons for the large U.S. Current Account deficit, whether it is a problem, what can be done to reduce this deficit, and how some investors try to mitigate potential risk associated with a deficit.
O'Sullivan, A., & Sheffrin, S. (2005). Economics. Upper Saddle River, New Jersey: Pearson Prentice Hall.
In November of 2004, the United States ran a fifty-four billion dollar trade deficit, translating to over 600 billion for the entire year. This deficit is a result of the disparity between the amount of goods that the US imports and the amount it exports. To equalize this deficit in its current account, the American government sells assets from its capital account, often to foreign investors. This phenomenon is seen as a serious threat to the success and continued growth of the nation’s economy, tied in with popular concerns that the United States is losing its competitive and dominant edge in global economics. The traditional economic theory employed to solve this problem calls for a return to mercantile protectionism, through use of tariffs and subsidies to drive up the price of imports and lower the price of exports. Running contrary to this is a second option: increasing domestic savings and lowering government spending. These theories both aim to decrease American dependence upon foreign imports and investment, and ultimately equalize the enormous trade deficit that currently exists.
The crucial importance and relevance of economics related disciplines to the modern world have led me to want to pursue the study of these social sciences at a higher level. My study of Economics has shown me the fundamental part it plays in our lives and I would like to approach it with an open mind - interested but not yet fully informed.
Sullivan, A., & Steven M., (2003). Economics: Principles in action. Upper Saddle River, New Jersey : Pearson Prentice Hal
Tragakes, E. (2012). Economics for the IB diploma (2nd ed.). Cambridge, UK: Cambridge University Press.
In 1996, the US current account and emerging market plus developing country current account were each about zero. In 2008, US current account was in deficit by $ 600 bn, the emerging market/developing country current account in surplus by $ 900 bn. (sect. 1.1)