The USA has had a significant current account deficit for several decades now. Explain why this may be the case for the last two decades and explain the consequences for the USA of this current account deficit.
Sample Solution
The US has had a current account deficit for more than two decades now, with the gap between income and expenditure widening over time. This is due to various reasons, some of which are related to the country’s economic policies.
Firstly, the government has been spending more than it earns in revenue since 1980s – running large budget deficits which have only been getting bigger over time. An increasing portion of this expenditure is on military activities abroad or welfare programs domestically, resulting in further reduction of available funds for investments that can spur economic growth. This excessive spending combined with low taxation levels leads to inadequate resources being devoted towards capital accumulation and domestic consumption.
Also, the US economy has shifted towards a service sector-focused model over the last few years leading to increased imports for services such as finance and professional services rather than goods like manufacturing products; this means money flows out from America instead of staying within its borders resulting in a trade imbalance in favor of other countries. Another factor influencing this outcome is globalization – with businesses investing extensively overseas (especially after 2000) lured by cheaper labor and production costs; these companies then send profits back home leading to significant outflows away from USA while repatriating profits earned elsewhere into their own coffers.
Finally, an overarching issue impacting all these previously discussed dynamics is exchange rate volatility caused by external factors like Fed Reserve’s interest rate policy or geopolitical tensions i.e., dollar appreciation making US exports uncompetitively priced globally compared to other economies thereby further widening current account deficit even when American trades at par with others locally in terms of cost base..
The consequences of this prolonged current account deficit include undermining USA’s ability purchase foreign currency reserves necessary for keeping overall balance payments healthy – thus creating higher dependence upon international lenders and debtors – as well as fluctuating exchange rates which make it difficult for investors & businesses operating both locally & internationally operate reliably surrounding financial risks associated with sudden spikes/dips led by macroeconomic considerations beyond any one central authority’s control
Sample Solution
The US has had a current account deficit for more than two decades now, with the gap between income and expenditure widening over time. This is due to various reasons, some of which are related to the country’s economic policies.
Firstly, the government has been spending more than it earns in revenue since 1980s – running large budget deficits which have only been getting bigger over time. An increasing portion of this expenditure is on military activities abroad or welfare programs domestically, resulting in further reduction of available funds for investments that can spur economic growth. This excessive spending combined with low taxation levels leads to inadequate resources being devoted towards capital accumulation and domestic consumption.
Also, the US economy has shifted towards a service sector-focused model over the last few years leading to increased imports for services such as finance and professional services rather than goods like manufacturing products; this means money flows out from America instead of staying within its borders resulting in a trade imbalance in favor of other countries. Another factor influencing this outcome is globalization – with businesses investing extensively overseas (especially after 2000) lured by cheaper labor and production costs; these companies then send profits back home leading to significant outflows away from USA while repatriating profits earned elsewhere into their own coffers.
Finally, an overarching issue impacting all these previously discussed dynamics is exchange rate volatility caused by external factors like Fed Reserve’s interest rate policy or geopolitical tensions i.e., dollar appreciation making US exports uncompetitively priced globally compared to other economies thereby further widening current account deficit even when American trades at par with others locally in terms of cost base..
The consequences of this prolonged current account deficit include undermining USA’s ability purchase foreign currency reserves necessary for keeping overall balance payments healthy – thus creating higher dependence upon international lenders and debtors – as well as fluctuating exchange rates which make it difficult for investors & businesses operating both locally & internationally operate reliably surrounding financial risks associated with sudden spikes/dips led by macroeconomic considerations beyond any one central authority’s control