Question

Below provides a summary of US current account in the year 2006 (in billions of $)

(1) U.S. exports of merchandise	+1019
+(2) U.S. exports of services	+411
+(3) U.S. income receipts	+626
=(4) Total U.S. exports and income receipts	=$2,056
(5) U.S. imports of merchandise	-1,836
+(6) U.S. imports of services	-341
+(7) U.S. income payments	-616
=(8) Total U.S. imports and income payments	= $2,793
(9) Net transfers by the U.S.	-54
(10) Current account balance (4) – ( 8) – (9)	-791

a) Should the US be concerned about its current account balance? Why or why not? What are the possible reasons for this observation?

b) Will U.S. tariffs help reduce a U.S. balance-of-trade deficit?

Answer 1

a) Current account deficit is not something that should always be worried about. In the short run, current account deficit can also imply that the nation is trying to enhance the economy for the long run by bringing in foreign investment.

As from the table from the question, the imports of merchandise and services can be used to build strrong economy. And hence, the US should not be concerned about the current account balance, provided they are able to redirect this investment to better use in the long run.

b) The observation from the above table that US imports more than it exports might convince many to believe that US traiffs would help reduce balance of trade-deficit. However, the same shall be reverted by exporting countries in the same manner by imposing tariffs on the imports that they have from US. Hence, this way US goods might become less price competitive in the global market. And more or less, imposing tariffs shall not create any difference with respect to trade deficit.