Question

Why “Increasing unemployment rate in United States may harm other countries Current Account?” Explain. (15m)

Answer 1

First lets see what current accont is. The current account is the sum of a nation's transactions with the rest of the world— its net exports, its net earnings on cross-border investments, and its net transfer payments to and from other countries.

Current account can be negative (spending more than earning from other countries), positive (earning more from other countries) or balanced (earnings and spendings are same). Its good for a country if the current account is positive as that means it is exporting more than its importing and is earning good returns on its investments abroad. US is usually a negative current account country as it imports a lot of stuff from many different countries and also because it gives a lot of aid to other countries which makes its net transfer payments negative.

As the US unemployment rate increases, it means that the US will import less as people do not have money to buy things. This will lead to the US current account improving, but that means the current account of other countries who export to US going towards negative. US will also give out less aid and hence it means other countries will have a reduction in net payments transfers. Due to these two factors the current account of other countries will be worse off if US unemployment increases.