Question

(b) The USA has run continuous trade deficits since 1980.

(i) Discuss these external deficits, making sure to describe the role of national savings, investment and net exports.

(ii) Briefly describe the evolution of American foreign assets/liabilities, and discuss the sustainability of this situation. (15)

(c) During the years 2002 to 2010, the current account of the Eurozone’s Balance of International Payments was broadly in balance with the rest of the world, running either small annual surpluses or small annual deficits. However, discuss the external balances within the Eurozone during this period, and their significance as a contributor to the financial crisis between 2007 and 2014.

Answer 1

i) Unless other economies in the World, US Economy facing the situation of spending more on Imports rather spending on Exports since1980. This situation is known as Trade Deficit. And also the demand for the payment for the Treasury note indicated the sign of safety of the investors. During the period of External Deficits, the Role of National Savings is such a way that it will not equalise itself with the Total Investment of the country. So there should be a equlibrium state in which Investment should equal to Savings. Savings will leads to decrease in inflation and affects the output of goods and services to meet the demands of the consumers in the short-run. But in the long-run, the Net Exports will impact as Negative Balance of Trade in which Decrease in Exports leads to Many producers cannot able to produce the products at very lower prices. They will curtail the production. Many employees will loose the job. This in turn leads to Un-employment in the Economy.

ii) The Evolution of American Foreign Assets/Liabilites was decribed in the form of forecasting its true situation of Trade Deficits in future. The Office of Economic Affair in IMF had declared the survey report is that More the rate of imports are likely to be increase the more the complication in price adjustment will take place in the long-run up to 2021. The Rate is calculated as 33%. Net International Investment Position (NIIP) had declared the negative results of Trade Deficits. The study indicates that the GDP with minus (-) 45% rate will fall more into (-) 53% in 2021. But the US Economy earns more of Foreign Assets rather the paying less for its Liabilities. So Sustainbility is calculated on the basis of calculating the rate of the GDP with filling up the gap of stabilization between Net Foreign Asset (NFA) and the Real Exchange Rate (REER). Net Foreign Asset is nothing but the balance of the Asset value after paying for the liabilities.

iii) There was huge Market Imbalance due to Negative impact of Trade Deficit of US. The Adjustment was made in the situation of Eurozone Balance of International Payments between 2007 and 2014. The measures were taken to increse the value of Imports and also potential output in non-trade activities was reduced leading to Favorable Balance of Exports. The Surplus Exports rate was witnessed. The Euro Commissiion (EC) paved the way for the increase in the nominal rate of REER and the TFP (Total Factor Productivity)