Question

Discuss policies that the U.S. could pursue to balance its high current account deficit. Also, discuss potential international factors that may help mitigate the current account deficit.

Answer 1

Answer: Current account deficit arises when a country has an excess of import of goods and services over the exports, ideally reflected in the balance of payments. Larger the current account deficit, more are the chances of recession, which shall demand huge capital financing from other countries of the world. As compared to the fiscal policies, monetary policies will not be that efficient in combating large current account deficit as the monetary actions taken shall directly offset the incomes and exchange rates and hence the external balance. Also, if austerity policies are implemented to permanently reduce the current account deficit, it would lead to a substantial decline in the U.S.’s Gross national product (GNP) and lead to severe unemployment. Fiscal policies, when worked together with monetary polcies, shall help to reduce the Current account deficit of the country.

Some of the potential international factors that can help mitigate high current account deficit are explained below:

1. U.S. should properly coordinate the economic policies in force both within the country as well as with the countries, with which U.S carries out trade operations. So, in order to achieve both balance of payments as well as achieving domestic economic goals, both monetary and fiscal policies should work together.

2. Also, U.S can provide tariffs and export quotas that can stimulate the consumers to limit imports and purchase and avail the goods and services produced within the country.

3. U.S should also bring into force the policies encouraging Balanced Budget, whereby the country cannot spend more than its earnings.

U.S should also focus on depreciating dollars in terms of other currencies, which can effectively be achieved by balanced budgets, rather than relying completely on the market sentiments for dollar depreciation.