Question

Analyze the following statements regarding the US external position:

a. The deterioration of the Net Foreigner Asset position means that foreign holdings of US issued assets have increased while domestic holdings of foreign issued assets have not increased.

b. The increase in the fiscal deficit in the last decades contributed to the current account deficits.

c. Investments in the US have been larger than domestic Savings which is equivalent to incurring a fiscal deficit.

Explain which statement is correct (and why) and why the others are incorrect.

Answer 1

a. Net foreigner asset refers to the value of the US assets owned by foreigners minus the value of the foreign  assets owned by the US. A deterioration in the net foreign assets would mean that the US assets owned by foreigners has decreased while the foreign assets owned by the US has not changed/increased. Therefore the statement is false.

b. Fiscal deficit refers to the difference between the total government expenditure and government revenue. The current account deficit is the difference between the value of the country's exports and imports. The current account deficit is a part of the fiscal deficit. Therefore, it is actually the case that an increase in the current account deficit over time has caused an increase in the fiscal deficit and not the other way round. Therefore, the statement is false.

c. American investment has been consistently higher than its savings because despite low domestic savings, it has been a hotspot for foreign investment. However, the current account deficit is determined as the difference between national savings and investment. But since the investments in the US are greater than savings, the current account deficit is higher. This is equivalent to recurring a fiscal deficit. Therefore this statement is true.