Question

Q. The U.S. economy appears to be performing well: Output growth has returned to healthy levels, the labor market is firming, and inflation appears to be under control. But, one aspect of U.S. economic performance still evokes concern: the nation’s large and growing current account deficit (negative net exports). Most forecasters expect the nation’s current account imbalance to decline slowly at best, implying a continued need for foreign credit and a concomitant decline in the U.S. net foreign asset position.

a. Why is the United States, with the world’s largest economy, borrowing heavily on international capital markets—rather than lending, as would seem more natural? b. What implications do the U.S. current account deficit (negative net exports) and our reliance on foreign credit have for economic performance in the United States?

Answer 1

ANS a

In the economy the debt are of two kinds , these are public debt and private debt ,and in general the government debt increases as the result of government spending and decrease of tax .In US economy the same effect can be seen very clearly , that government had increased the autonomous investment in the economy which relates to the building of roads ,dams ,bridges and other infrastructure which would elevate the welfare of the society and is really necessary for the developed nations .The second cause which was seen which resulted in increase in national debt was the decrease in taxes.To overcome this situation the US government could have increased the taxes like that of scandavanian nations like sweden, finland etc but it didn't so the cutting if taxes resulted in low governmebt revenue .So US government has to rely more on International capital market borrowings .

ANS b

In US the sheer size of current account defecit has attracted the concentration of many economists since 2006. This has the implication to a threat in the mind of people that whether USA can pay the decent return to investors or not , as no other country in the world this large has ever had this huge amount of defecit .This further will have an implication that if investors panicked then they will start to sell of US assets at any price and then the dollar will collapse.The trade defecit or negative net exports have harmed the US economy in three different ways , which are it has lead to decrease in millions of US manufaturing jobs . It has lead to decrease in wages and salaries of the workers , the workers who are been unemployed find the job some where else ,prefferably in the service industry and this leads them to work for much lower wages .The third prblem which arises due to this issue is the corrosive effect of long term competitiveness, it leads to closure of plants and manufacturers which do not reopen for a long time and then the national currency collapse.