Question

Twin Deficits: Please explain what is meant by the Twin Deficits and include in your answers the following: The federal budget deficit, the trade deficit, the role of U.S. currency, how the trade deficit funds the budget deficit.

Answer 1

In economics, when a country has both a current account deficit and a structural deficit, a twin deficit occurs. Twin deficits can also be called a double deficit.

Government budgets consist of the following: Nominal tax revenue inflows and borrowing Nominal outflows from spending and interest payments Governments borrow money by selling bonds, and then pay interest on those issuances. A budget deficit arises when government spending is greater than tax revenues. Whereas when government receipts surpass government expenditures, a fiscal surplus exists. You can also call a fiscal deficit a budget deficit or a budgetary deficit.

The budget deficit constitutes an significant part of federal spending that has to be funded by debt issuance. It is usually not seen as positive because such debt raises the amount of high-quality debt available to investors and has a negative effect on private borrowers 'supply of funds, thereby increasing the real interest rate for private loans. Moreover, the future generations who will have to pay for these borrowings by increased tax revenues won't reap the full advantage of today's additional government spending.

The current account deficit is the result of imports exceeding exports, or "trade deficit." This is generally financed by a net inflow of foreign capital into the region. In general, many find such an imbalance unwanted. This is because foreign products manufactured by foreign workers meet rising demand from consumers. It's to the detriment of domestic labor. Furthermore, it can go against public opinion that international interests own an growing amount of domestic properties, including federal government debts. A less politically correct view is that foreigners provide more cheaply than can be generated domestically products which consumers want.