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USA Current account deficit Surviving but not thriving Essay topic Number 1Submitted By Kamal Kaushik Submitted to Prof. Mark Hitti Table of Content1. Introduction.......................................................................... 22. Critical Discussion ................................................................. 32.1 Situation of current USA Economy.................................................. 32.2 Reasons for high debts current account deficit..................................... 32.3 How is the US economy sustaining such high debts from so long.............. 42.4 Possible solutions for US current account problems andcountries to come out of deficit............................................................. 43.Conclusion............................................................................... 5 4.Bibliography............................................................................ 6 5.Appendix................................................................................ 8IntroductionThe United States (U.S.) has the world's single largest economy, accounting for a nearly a quarter of global GDP.
It is the most important export destination for one-fifth of nations around the world. The current account deficit in the U.S. as of 2018 is $ 488.5 billion reflecting the high quantum borrowing of the American citizens, businesses, and government, thus being the world's largest deficit. The main cause of the current account deficit was the U.S., trade deficit which occurs when a nation imports more than its exports.In the third quarter of 2018, there was a fall of 17% in the deficit and was the lowest in three years due to an increase in the oil exports owing to the shale oil production in Montana and Texas.
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However, the trade deficit still accounted to $621 billion in 2018 as per the U.S. census higher than $557 billion in the year 2017. Main objectives of this study is to analyse the situation of U.S. economy, why it can sustain the in such high debts, reasons for the high debts of the current accounts and possible solutions for the problem.Critical discussion1. Situation of current U.S.
economyThe U.S. current account balance is a summary of international transactions by firms, households, and local, state and federal governments involving currently produced goods and services. It shows the imbalance in a countries saving to its investments. Every year since 1992, U.S has had a present record shortage, topping at $5.5 billion in 2003 or about 5% of GDP as on 2018 which is 3% of the GDP (Figure 1 & 2).2. Reasons for high debts current account deficitIn the year 2018, the U.S imported a total of $1020 billion consumer goods and automobiles, while only exporting $359 Billion thus increasing the trade deficit by $420 billion.In macroeconomic theory, net exports”the nation's trade balance”equivalent national savings minus investments i.e., NX = S " I.2 Thus, imbalanced exchange infers inadequate national investment funds (private savings plus government savings) to back national investment ( Figure 5). Consequently, as sparing and speculation ended up confused, the saving gap (S " I) started to grow more and more negative around the mid 1970s, recommending quickly gathering private debt and public obligation in the U.S... From 1980 to 1987 the trade deficit and current account deficit widened (the last to $153 billion speaking to 3.5 percent of GDP), however then they limited to close adjust in 1991. Amid the 1990s both moved once again into shortfall, with the present record deficiency enlarging to $233 billion out of 1998, speaking to a change from zero to 2.7 percent of GDP.The U.S. current account deficit, according to IMF calculations, will increase by 50% from 2016 to 2019 " from $430 billion to $650 billion. There has been no such increase for a long time (Figure 3).Therefore, in examining the causes for the deficiency, we need to look to both cyclic and structural reasons. The following factors added to the U.S. deficiency's size by driving investors to Treasury's.—Џ The global stock market crash in 2000 and 2008 sent investors from stocks.—Џ The dollar declining 40% from 2000 to 2008. —Џ In the late 1990s, Argentina and other Latin American nations defaulted on their loans.—Џ In the late 1980s, the South East Asian emerging markets crashed. It's taken this long for investment to return.—Џ In the late 1980s, Japan's real estate market fallen. That cut down the nation's economy.The U.S. ran either a surplus or a small deficit through the 1960s and 1970s, after which a large deficit opened in the 1980s and continued to expand through the 1990s and 2000s.3. Why is the U.S. economy sustaining such high debts since longThe US has the world's single biggest economy, accounting for nearly a quarter of global GDP (at market trade rates), one-fifth of international FDI, and more than a 1/3 of stock market capitalisation. It is the most important export destination for one-fifth of nations around the world. The US dollar is the most widely used foreign money in global exchange and monetary transactions, and modifications in US monetary policy and investor sentiment plays a major function in using global financial stipulations.Theimportance of the U.S. economy will prevent any catastrophic crash. All lenders would be working diligently to keep the U.S. economy afloat. They know th at all their ships, too, will go down if the U.S. ship goes down. ‹Many experts around the world think the U.S. current account deficit is the greatest threat to global prosperity. ‹The sheer size of the deficiency raised worries about whether the U.S. economy could pay a come back to the market. Nobody can forecast what this tipping point could be, on the grounds that no nation with an economy this enormous has ever run a shortfall this huge. On the off chance that foreigners panicked and began selling their assets at any value, it could make the dollar depreciate resulting into global economic crisis. To keep the U.S.. Economy floating which has heavy impact on global economies countries are still willing to give money to U.S. which are helping them to sustain even after 40 years of current account deficit with low chances of paying their debts of the world.Possible solution for Unites States current account problem and countries to come out ofdeficit4.According to a few economists, President Trump's recent increase on the tariffs on Chinese goods may also be ineffective towards decreasing the trade deficit of the country. —Џ The first is to cut spending, try and reduce the government spending by 10 percent in order to increase savings—Џ The second is to raise taxes. That could result into slow growth of the economy. That is particularly valid if the tax rate is over 50 percent, as indicated by the Laffer curve. However, the budget 2018 has reduced the taxes does showing its effect on the economy deficit by increasing the spending power to the companies to increase exports .( figure4)—Џ The third is to drive economic growth at a faster rate in comparison to debt. This means devaluating the debt to GDP ratio by increasing GDP—Џ To pay off the debts, the government should move spending from defence to public education and training. This is one of the best ways to create more jobs and more efficient employees in the future.—Џ A good way to increase the personal savings rate would be automatic payroll deductions for 401(k) plans. Studies show that people are more than willing to save if they don't have to make the decision. If they have to opt out of payroll deductions, they tend not to do itConclusionAccording to the study it is shown how U.S. economy is the spine of the global economy. The U.S. obligation surpassed $22 trillion in February 2019. The U.S. Treasury appraises the obligation will surpass that limit in September 2019. That could promote the repeat of a rehash of the 2011 and 2013 debt crisis. The rising U.S. current account deficit is another issue added to the many existing problems of the global economy. It burdens the capital markets and makes the circumstances more unstable. This is especially significant when the business sectors are anxious and uncertain at any way, as they are right now. Economies with current account deficit doesn't hold as much of the global economy as U.S. so for them to come out of this big hole is very important.They could adapt quite a lot of reforms to come out of the deficit like :? Depreciation of currency (make exports less expensive " imports progressively costly)? Reduction in domestic consumption of the country and spending on imports (for exampletight monetary policies/ higher duties and taxes)? Supply side policies to improve the intensity of household industry and fares.With all the understanding of the current situation of US, the question still arises that will the US economy ever be able to pay its debts? And till when can the deficit be sustained?President Donald Trump's tax cut 2017 and increase in the tariffs on the Chinese imports have only made the dollar stronger in the market thus disheartening importers of other countries. The study of economic policies and strategies of the U.S. will be a really interesting chapter in the future.Bibliography—Џ Voxeu.org. (2019). ‹Understanding the global role of the US economy | VOX, CEPR Policy Portal‹. [online] Available at: [Accessed 17 May 2019].—Џ The Balance. (2019). ‹The U.S. Current Account Deficit: Threat or Way of Life?.‹ [online] Available at: [Accessed 17 May 2019].—Џ Schwartz, A. (2019).‹Interpreting the U.S. Current Account Deficit.‹ [online] Urresearch.rochester.edu. =247 [Accessed 17 May 2019].—Џ Stlouisfed.org. (2019). ‹Understanding the Roots of the U.S. Trade Deficit | St. Louis Fed‹. [online] Available at: roots-trade-deficit [Accessed 17 May 2019].—Џ Economics Help. (2019). ‹Policies to reduce a current account deficit - Economics Help.‹ [online] Available at: [Accessed 17 May 2019].—Џ PIIE. (2019).‹On the Causes of the US Current Account Deficit‹. [online] Available at: [Accessed 17 May 2019].—Џ Hu€fner, M. (2019). ‹Will the US Current Account Explode Soon? - The Globalist.‹ [online] The Globalist. Available at: [Accessed 17 May 2019].—Џ Finance & Development | F&D. (2019). ‹Finance & Development.‹ [online] Available at: [Accessed 17 May 2019].—Џ The Balance. (2019). ‹An Overlooked Way to Reduce the U.S. Debt While Boosting Growth‹. [online] Available at: [Accessed 17 May 2019].
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