Question

1. Say that US government is starting to run huge budget deficits, and at the same time foreign governments started importing a lot of US produced goods, is it possible to have current account deficit of US not to change? What will happen to world interest rates in that kind of scenario? (ch7)

Answer 1

The current account is the difference between the exports and imports expenses.

Current Account= Total exports – Total Imports

As the demand for exports in the USA is increasing, the total export part of above equation will be increasing and it will result in the US to earn more foreign exchange by selling these exports.

The budget deficit can be given as the when the total government earning is less than total governing expenditure

i.e. Budget deficit= Total government earnings – total government expenditure

As in the case, it is stated that the US is having increased export, it means the government is earning the foreign exchange but due to an increased budget deficit, it indicates that government expenditures are more than the government income. As there is an increased government expenditure, there can be a case that USA government is importing many products and this results in having the increased total imports.

In this situation, despite having the improved exports, the current account deficit may be same due to increased imports of the goods.