Question

Robert Carbaugh asks the the question, "Can the United States continue to run a current account deficit year after year?"

Carbaugh discusses the pros and cons of the U.S. government continually running a current account deficit. His arguments for and against current account deficits are quite compelling. Not only that, this question carries plenty of relevance being that we borrowed heavily to dig our economy out of recession.

I would like for you to discuss in detail where you stand on this issue and give valid economic reasons why.

In your analysis of this discussion question, I want you to take into consideration the emergence of China and India as economic powerhouses. Think about how these two countries' bourgeoning middle classes may affect our current account. Please keep this an economic discussion and not a political discussion.

Answer 1

In recent years the U.S. external deficit has attracted considerable attention from academics, policymakers and the media as well. The recent trends that has raised concerns is a growing trade deficit, the difference between U.C. exports and impoerts of goods and services.

When a country runs a current account deficit, its purchases of goods and services from abroad exceed its sales of goods and services to foreign buyers. At the same time, the country is necessarily selling assets to foreigners, net of its purchases of assets abroad, in an amount equal to the current account deficit. Consequently, as current account deficits have accumulated over the period of time, the net international investment position of the U.S., the difference between U.S. owned assets abroad and foreign owned assets in the U.S has grown even larger.

The U.S situation is completely different, to the extent that the foreign exchange value of the dollar declines, the effect on the values of U.S. and foreign asset holdings works not as an accelerator of crisis, but as a part of a self-correcting mechanism. Dollar denominated U.S. liabilities remain unchanged in domestic value, which means that debt service in dollars and relative to the size of the U.S. economy does not change.

As a practical matter, the U.S. net international investment position cannot become even more negative as a percentage of GDP. In fact, economic theory suggests that it's likely that today's current account deficits will need to be trimmed or reversed over the long run.

Talking about China and India,

China can produce many consumer goods for lower costs than other countries can. Americans of course want these goods for the lowest prices.

China's people have lower standard of living which allows companies to pay lower wages to workers and also an exchange rate that is partially fixed to the dollar so this helps China to keep the prices low. So that means American companies can not compete with China's low costs, as a result, U.S. manufacturing jobs are lost.

India's middle-class growth is accelerating at very high pace. It's predicted that from 2027 India's population is set to overtake China's and the middle class will overtake that of U.S., Europe and China as well. India's household saving rates have also tripled and many were lifted out of poverty. As currently India is focusing more on Industrial and Agriculture sector it is more likely to help its economy to boost in next few years.