Question

In your opinion, what has caused the current account deficit of the USA in recent history? Is this a problem? Why or why not?

Answer 1

According to me, there are several reasons that caused current account deficit in the USA:-

1). US consumer spending has been rising rapidly due to a combination of:-

a). Tax cuts

b). Low interest rates

c). Rising house prices

Therefore with rising consumer spending, the US has been increasing the value of its imports. Also, the Americans have a high marginal propensity to import, making many luxury goods like cars and electronic items being imported in bulk.

2). Decline in competitiveness:- The American manufactured goods have been losing the comparative advantage to Asian countries, with the primary reason being very high labour cost in the US. In particular, China has seen its trade surplus grow with America due to low labour cost in China.

3). Dollar Relatively High compared to Current Account Deficit:- The Dollar has not devalued much as one would expect for an economy with a large current account deficit, making the US an attractive location for capital investment. In particular, China has been buying a lot of US government securities, and thus this inflow of capital has financed the current account deficit, encouraging the American to keep importing goods. This inflow of capital has also enabled interest rates to remain low. These low-interest rates have encouraged consumer borrowing and spending; a major cause of current account deficit.