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.
The United States Current Account deficit continues to rise as a share of GDP. It reached a record high of 5.7% GDP in the first half of 2005, before declining to an average of 3% GDP by 2011-2012. Although there are many contributors for the 2005 level, many blame the U.S.’s lackluster interest in reducing its budget deficit; specifically, open spending on the War on Terror while proposing tax cuts was likened to fiscal delusion. Consider the following equations:
Current Account ≡ Export – Import and (S – I) + (T – G) ≡ X – M ≡ Current Account
Since both the US government and its citizens ...
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