Question

Some economists are not worried about the record current account deficit of the United States. Explain why that might be the case. Compare it with the situation of countries like Mexico and Brazil in the 80s and 90s.

Please provide a full answer.

Answer 1

country's current account can be calculated by the following formula:

CA=NY+NCT+(X-M)

Where CA is the current account, X and M are respectively the export and import of goods and services, NY the net income from abroad, and NCT the net current transfers.

wheres wheres as current account deficit means that means that funds are not sufficient to meet yearly expenses.

which means net income from export is less than the imports.

According to this ,it means that country facing problems in paying the external debts

It is also said that the US has become a "net debtor" nation, increasing the risk of depreciation of currency which might lead to financial crisis. Also, with a current account deficit and a negative net international investment position there are chances of failures or unable to meet current account exoenses of country, comparisons can be seem with Argentina, Brazil, Mexico and other countries that at times who have experienced many imbalance in balance-of-payments crises.

The familiar crises were faced by several Asian countries in 1997-98, by Mexico and by many other countries have all involved to the situation which have affected countries who have large external debts carried in foreign currencies.

U.S. situation is totally different. To the extent that the foreign exchange value of the dollar decreases, the effect on the values of U.S. and foreign asset holdings works not as an accelerator of crisis, but as 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. Moreover, holdings of U.S. investors abroad, about two-thirds of which are denominated in foreign currencies, appreciate in dollar terms. The composition of the U.S. international investment account, therefore, contributes to stability rather than to instability.

due to the stability and proper implementation in policies economist do not record much about current account deficit.