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    U.S. Goverment Financing/Balance of Payments

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    Your hometown newspaper needs someone to write an informative article on large scale economic issues. The reporter who spoke with you before thinks of you, welcomes you home, and requests another article. The attached document named BOB is a summary of disaggregated data drawn from information provided on the 2000 U.S. balance of payments which is in the 2002 federal document, Economic Report of the President, available on the web.

    In addition to the balance of payments data presented above, the Bureau of Economic Analysis' document entitled, International Investment Position of the United States (http://www.bea.gov/bea/newsrel/intinvnewsrelease.htm) offers the following information.

    "At year-end 2002, the value of foreign investments in the United States exceeded the value of U.S. investments abroad by $2,387.2 billion (preliminary) with direct investment valued at current cost. At year-end 2001, foreign investments in the United States exceeded U.S. investments abroad by $1,979.9 billion (revised)."

    Write an article on the United States's current account deficit. The reporter will edit your material down to a usable length but asked for plenty of material with which to start. She requests that you answer the following questions:

    What has caused the U.S. run a merchandise trade deficit year after year since the early 1980s?
    Is the current account a deficit problem? Explain.
    Is the trend of the international investment position of the U.S. problematic? Why or why not?
    How is the current account related to a country's business cycle?
    What is the relationship between a country's net financial inflow and its current account?
    How does the U.S make adjustments for the balance of payment issues?

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    Solution Preview

    In accordance with the BrainMass rules this is not a completion of assignment but only background help.

    STEP 1
    What has caused the U.S. run a merchandise trade deficit year after year since the early 1980s?
    Merchandise Trade Deficit refers only to trade in goods. Even though goods account for about 70 percent of US exports and 84 percent of US imports, merchandise trade balance gives us a partial picture of the entire trade deficit.
    The US has run a merchandise trade deficit year after year because the US has been importing more than it exports for more than twenty years. In fact since 1991 the deficit for trade in goods and services have been increasing gradually.
    One interpretation of the trade deficit is that it shows that the US economy is consuming more than it is producing and is funding the process with foreign capital. These loans will have to be paid back in future.
    If we examine the bilateral deficits the US has with different countries we can evaluate the nature of the trading relationship between the US and specific countries.
    This material is taken from the website: http://www.usitc.gov/tradeshifts"
    The economic performance of the United States and all of its major trading partners improved in 2004, but the growth of the U.S. economy outstripped most of its partners'. As a result, the increase in U.S. demand for foreign goods exceeded the increase in foreign demand for U.S. products.
    · In 2004, U.S. exports in each merchandise sector except for footwear increased, for an overall rise of $75.8 billion (12 percent) to $727.2 billion, exceeding export levels in 2000 and recovering completely from the decline during 2000-2002. Semiconductor manufacturing equipment, medicinal chemicals, and telephone and telegraph apparatus together accounted for $13.1 billion (17 percent) of net export growth.
    · In 2004, U.S. imports for all merchandise sectors recorded an overall increase of $210.1 billion (17 percent) to about $1.5 trillion. Although a number of industry groups recorded major import growth, crude petroleum and petroleum products, computers and parts, and steel mill products accounted for $64.5 billion (31 percent) of the net import increase.
    · The U.S. merchandise trade deficit expanded from $598.7 billion in 2003 to $733.0 billion in 2004, as imports increased approximately three times faster than exports.

    STEP 2
    Is the current account a deficit problem? Explain.

    Not really.
    The current account deficit means that the US has taken a loan. Now the important thing is what the US does with this loan. If it finances investment that is productive, the US economy will benefit from greater productivity, income and output. The US will then be able to support the future repayments that it needs to make. The current account deficit will be a problem of major portions of the loans ...

    Solution Summary

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