Question

Discuss the domestic and international determinants of the U.S. current account deficit.

Answer 1

Current account deficit takes place when a country's total exports are less than the country's total imports. US trade deficit is the main cause of the US current account deficit. There are various domestic and international determinants of the U.S. current account deficit. These are mentioned below:

1) High consumer spending: A low saving ratio & high consumer spending encourages people to buy imports. When people have more disposable income then they buy more goods. In such a scenario, if domestic producers are unable to fulfil domestic demand, then goods are imported from abroad. Also, low real interest rates leads to low savings ratio.

2) Decline in export sector: The decline in competitiveness in the US manufacturing sector has made US exports relatively less competitive. This has contributed to persistant deficit in the balance of trade. Lack of innovation which would have improved productivity & efficiency in the manufacturing sector is the cause of decline in competitiveness in the US manufacturing sector.

3) US Government debt: High level of government debt lead to current account deficit. This is so because, government debt has increased due to tax cuts, tax cuts have increased disposable income of people which increased consumer spending which led to increase in level of imports & reduced the saving ratio.

4) Overvalued exchange rate: When currency of a country is overvalued then it will result in cheaper imports & will lead to higher imports. Due overvalued exchange rate, i.e., a strong US dollar makes exports relatively uncompetitive which will lead to fall in exports.