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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. Click here to view 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 a 2-3 page 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 Summary

The increase in the deficit in American is rationalized.

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UPDATED RESPONSE:
Q What has caused the U.S. run a merchandise trade deficit year after year since the early 1980s?

A. Several reasons which can be cited for increase in the deficit:

1) Imports of goods, services and income are 40% bigger than exports. And this ratio is on the rise again.
2) Higher US interest rates increase debt payments to foreign debt holders.
3) Slowdown in global growth, especially in Asia.
4) Soaring cost of imported oil: it is worth noting that our oil import bill has risen by about $110 billion, from $68 billion in 1999 to $180 billion in 2004, and most of this increase reflects higher oil prices.

5.) Negative Real Interest Rates in Reserve Currency (US dollar):

The Fed has been lowering rates since the tech bubble burst in 2000. Interest rates have gone from a high of 6.5% to a low of 1% over the course of 3 years. This coincided with an 18% fall in the US dollar index over the same period. Between 2003 and 2004, the dollar continued to decline another 18% against the euro as countries such as the UK, Australia, and New Zealand all began raising rates while the Fed dragged its heels.

Q Is the current account a deficit problem? Explain.

The deficit has some positive features.
One of the factors driving the U.S. economic expansion has been productivity growth, itself driven by rising investment rates, sound investment decisions, and globalization. ...

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