This website uses cookies to ensure you have the best experience. Learn more

An Overview Of “The U.S. Current Account Deficit”

2276 words - 10 pages

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 spent more than they received in revenues, money had to come from outside the U.S. borders. It did so in the form of a Current Account Deficit. The US and its consumers were happy to give “IOU’s” to those willing to accept them. Developing Asian countries and their Central banks, notably China, had an “insatiable appetite” to invest in US assets and to keep the dollar strong. A twisted form of symbiosis developed, where foreign countries act as sellers that finance the purchase for the U.S. consumer, who in turn falls deeper in debt. It becomes a risky dance between two partners, and neither wants the music to stop.

How long will foreigners continue to purchase U.S. Treasury securities to finance the soaring budget deficits? Too much borrowing and accumulating international obligations can precipitate financial and economic disasters. Furthermore, if there was a rapid decline in the deficit, it could potentially cause a recession. The U.S. cannot continue to add to the deficit or else there will inevitably be a crisis.

Many U.S. corporations have moved their production overseas to countries like Mexico and China to take advantage of lower production costs. In 2009, U.S. direct investment overseas was $221 billion...

Find Another Essay On An overview of “The U.S. Current Account Deficit”

Does Australia have a current account deficit?

3451 words - 14 pages 1998 to 2003 are being discussed. After that the solutions, recommendations, and conclusion are being described.Current Account Deficit"Current account deficit means an excess of imports over exports of goods, services, investment income, and unilateral transfer (Carbaugh, 2002, p.350)." It is also stated that when a nation experiences a current account deficit, its expenditures for foreign goods and services are larger than its incomes received

Current Account Deficit Challenges India's Economy

2080 words - 8 pages The current account deficit is one of major challenges that Indian economy is facing. It has pulled down the economy growth to 4.8% from average growth of 5.5%. The current account records the trade of goods and services of an economy with other countries of the world. It consists of net exchange i.e. exports minus imports of goods, net exchange of services and net transfers to and from the country. Balance of the account before calculating the

Discuss the main features of Australia's recent Balance of Payment performance & the impacts of a high current account deficit on the Australian economy

1012 words - 4 pages Australia's balance of payment is a record of all transaction between Australia & the rest of the world (over a period of one year). It consists of two account, the current account (which measures money flows from exports/imports, income and current transfers) and the Capital & Financial Account (Financial assets or liabilities). The BOP is an indicator on the health of the economy because it records financial transactions coming in and

The U.S Budget Deficit

1896 words - 8 pages problem one has to research the past to figure out how the U.S budget deficit got to where it is now. Hopefully by figuring out this, one could project what the U.S budget deficit will look like in years to come. Past During the 1940's which would be the World War II and great depression era, there was an increase in debt. This was because of all the funding that went towards the war and New Deal policies. In 1943, the GDP reached the highest

The Current State of the U.S. Economy

632 words - 3 pages The Current State of the U.S. Economy The United States economy is racing ahead at dangerous speeds, and it may be too late to prevent the return of widespread inflation. Ideally the economy should move ahead gradually and grow at a steady manageable rate. Mae West once stated “Too much of a good thing can be wonderful” and it seems the U.S. Treasury Secretary agrees. The Secretary announced that due to our increasing surplus and booming

Current State of the U.S. Economy

1417 words - 6 pages , the largest one-month gain since the recession officially ended in November 2001. Unemployment has held steady at 6%. Economic growth leaped 7.2% in the third quarter, while worker productivity rose a remarkable 8.1%. The four-week moving average of initial applications for unemployment benefits dropped from 420,500 to 408,750. This improvement in the labor market could be an indication that the economy is strengthening. A recovery in the labor

“an Overview Of The Current And Future Importance Of Oil In The World In Terms Of Energy And Resources”

1536 words - 6 pages "AN OVERVIEW OF THE CURRENT AND FUTURE IMPORTANCE OF OIL IN THE WORLD IN TERMS OF ENERGY AND RESOURCES"PART 1Crude Oil, 'Black Gold' as it is popularly known is perhaps the single most important source of energy that is finite and will soon run out. The main sources of this oil are the wells of Saudi Arabia, Iraq, Iran, Canada, USA, Kuwait, and so on. Fossilized remains of plants and animals that lived millions of years ago, were subjected to

Nursing: An account of the subject area

1541 words - 6 pages I am presently employed as an enrolled nurse on the bank of a large general trust hospital in the north west of England. I qualified as an enrolled nurse in 1972. At present I work on a male medical ward, which has twenty-five beds. Some common disorders which patients suffer from in the area where I work are: Complication of Diabetes, Chronic Pulmonary Disease, Chest infections, Hypertension, Chronic confusion. I estimate that 80% of our

An overview of the olympics

580 words - 2 pages The Olympic Games are an international sports competition. In the Olympics, athletes play in many types of games. Some athletes compete in the Summer Olympics. Some compete in the Summer Olympics. The Olympic Games are very old and have a very interesting history.The first Olympic Games were held in Greece in ancient times. They probably began in the sixth century B.C. The contests are held every four years in the summer. The first games lasted

An essay on the International Criminal Court, with a mark of 18.75/20. Including- Overview, History, Jurisdiction, Structure, Rights of the accused and Current Cases

1026 words - 4 pages Pakistan over Kashmir. The United States has not signed the treaty citing that it denies fundamental American human rights, it is a political court without appeal, and there is an absence of jury trials, no right to a speedy trial, public trial or reasonable bail although these are all elements of the American military trials which have been used to try David Hicks and other Guantanamo Bay prisoners.>In 1948, following the Nuremberg and Tokyo

The Trail of Tears: An Account of the Cherokee Journey

744 words - 3 pages made his decision; let him enforce it now if he can."Most Cherokee resisted the Indian Removal Act, but a small minority thought it futile to continue the fight... they thought that they could only save their culture by signing a treaty with the U.S.In 1835, the U.S. sought out that minority to sign a treaty in New Echota, Georgia. At most 500 Cherokee were there, none of which were elected officials of the Cherokee Nation. Twenty of the attendants

Similar Essays

The Current Account Deficit Essay

3032 words - 12 pages shifts to domestic goods – this leads to an increase in output and exports, leading to an improvement in trade balance. Causes of a high CAD: Structural Causes Hence, we need to look at more situational and structural reasons for India’s current account deficit: 1. Imports: looking away from oil and gold: India has some of the greatest oil reserves in the world and yet imported 135 million tonnes in 2012-13. The fertilizer sector

The Causes Of Current Account Deficit

974 words - 4 pages The causes of current account deficitAustralia's CAD will be one of the entering years biggest economic stories in the media at the end of the financial year 1998-1999. There is a likelihood the deficit will increase to an amount to per 6 percent of gross domestic products.In Australia for the last two centuries the balance has almost been deficit the past twenty yeas the level of the deficit has increased notably. In 1970's the current account

The United States Current Account Deficit

1417 words - 6 pages 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

Why The Balance Of Payments And The Current Account Deficit Are So Important

899 words - 4 pages Why Is the Balance of Payments and the CAD So ImportantThe balance of payments is a summary of all Australia's transactions with the rest of the world. The balance of payments may give an explanation for, as an example, why the value of the Australian dollar has appreciated. A current account deficit occurs when the current account does not balance but is negative. The reason Australia has a current account deficit is because of greater levels