U.S current account deficit

THE U.S CURRENT ACCOUNT DEFICIT

By: Tazeen Azeem , Muhammad Naveed, Sabaha Gul Khan, Muhammad Saud, Farah Mazher ,Syed Anwar

It measures a country's imports and exports of goods, services and capital.

It is in balance when the people, businesses and government have enough income and savings to fund all purchases occurring in that country.

The Current Account:

A current account deficit is when a country import more goods, services and capital than they export.

Current Account Deficit

Positive sign of growth

Negative sign that the country is at credit risk

The U.S Current Account Deficit

1980 1985 1990 1995 2000 2005 2010

Why the richest country on the earth is facing current account deficit?

The U.S Current Account Deficit

The Bureau of Economic Analysis divides the current account into four components:

Trade Net incomeDirect transferAsset income

•It occurs when a country's imports more goods and services than it exports.

Trade-deficit

Net Income-deficit

•The income paid out by a country's individuals, businesses and government to their foreign counterparts is more than they receive, it contributes to a deficit.

Direct Transfers-deficit

•Wages sent back to a foreigner's home country.•Direct investments made abroad by a country's residents.•Bank loans to foreigners.

Asset income-deficit

•Loans made by foreign banks abroad to domestic banks.

•Sales of the stocks and bonds to foreigners.

•Foreign direct investment, such as reinvested earnings, equities and debt.

How To Calculate Current Account –

by Muhammad Naveed

The Current Account is calculated adding up the following four components,

1. Goods

2. Services

3. Income

4. Current transfers

Goods

Being movable and physical in nature, goods are often traded by countries all over the world. When a transaction of certain good's ownership from a local country to a foreign country takes place, this is called an "export." The other way around, when a good's owner changes to a local inhabitant from a foreigner, is defined to be an "import." In calculating current account, exports are marked as credit (the inflow of money) and imports as debit. (the outflow of money.)

Services

When an intangible service (e.g. tourism) is used by a foreigner in a local land and the local resident receives the money from a foreigner, this is also counted as an export, thus a credit.

Income

A credit of income happens when an individual or a company of domestic nationality receives money from a company or individual with foreign identity. A foreign company's investment upon a domestic company or a local government is also considered as a credit.

Current Transfers:

Current transfers take place when a certain foreign country simply provides currency to another country with nothing received as a return. Typically, such transfers are done in the form of donations, aids, or official assistance.

A Formula for Calculating Current Accounts

CA = ( X – M ) + NY + NCT

CA is the Current Account.X and M the Export and Import of Goods and Services respectively.

NY the Net Income from Abroad.

NCT the Net Current Transfers.

THE ECONOMIC IMPACT OF DECLINING CURRENT ACCOUNT DEFICIT

In The Short-Run

A current account deficit is mostly advantageous. Foreigners are willing to pump capital into a country to drive economic growth beyond what it could manage on its own.

THE ECONOMIC IMPACT OF DECLINING CURRENT ACCOUNT DEFICIT

In The long Run a current account deficit can sap economic vitality. Foreign investors may begin to question whether economic growth can provide an adequate return on their investment.

U.S. TRADE DEFICIT BY COUNTRY

BY SABAHA GUL KHAN


TRADE DEFICIT

The U.S. has run a trade deficit since 1975. In 2012, the deficit in goods and services was nearly $540 billion. This means that U.S. exports of $2.194 trillion were less than its imports of $2.73 trillion in goods and services

Bureau of Economic Statistics

International trade is measured by the Bureau of Economic Statistics within the U.S. Census Bureau.


U.S. Trade Deficit in Goods

Then U.S. Trade Deficit in goods alone was $726.7 billion. That's because the U.S. exported $1.547 trillion in goods, while importing $2.275 trillion. However, U.S. exports have been strengthening compared to imports, because the goods deficit was nowhere near the record deficit of $828 billion set in 2006.


World's Third Largest Exporter

1. EUROPEAN UNION ($ 2..17 trillion)

2. CHINA ($2.05 trillion)

3. GERMANY ($1.4 trillion)


Three Different Criteria

IMPORT

Cheap consumer products Oil

EXPORT

Agricultural products, Industrial Supplies Capital goods

o IMPORT MORE THAN EXPORT


COUNTRIES WITH THE LARGEST DEFICITS AREN'T NECESSARILY THE LARGEST PARTNERS:

Canada - $616.6 billion traded with a $31.8 billion deficit.

China - $536.2 billion traded with a $315 billion deficit. Mexico - $494 billion with a $61.3 billion deficit. Japan - $216.4 billion traded with a $76.3 billion deficit. Germany - $157.3 billion traded with a $59.7 billion

deficit.

TRADE DEFICIT WITH DIFFERENT COUNTRIES

Trade Deficit With China. Trade Deficit With Japan. Trade Deficit With Germany. Trade Deficit With Canada. Trade Deficit With Mexico. Other Trade Deficits Were Mainly Caused by

America's Need for Oil.

Economist Reviewby

Muhammad Saud

We are discussing five different point of view the economist on sustainability issue. The models used to estimate changes in the dollar and CA are not empirically derived; they are simulations based on theoretical assumptions meant to be consistent with reality.

Economist Review

Following are the economist those analysis we will discuss,

• Economist Maurice Obstfeld and Kenneth Rogoff.• Economist Olivier Blanchard, Francesco Giavazzi, Filipa Sa.• Economist Sebastians Edwards.• Economist Nouriel Roubini and Brad Setser.• Economist Paul Krugman.

Economist Review

HAVE ESTIMATED HOW MUCH THE DOLLAR WOULD NEED TO DEPRECIATE IN ORDER TO MAKE THE CA DEFICIT DISAPPEAR. IN THEIR MODEL, SHOCKS TO AGGREGATE DEMAND OR SHIFTS IN THE DEMAND OR SUPPLY OF TRADEABLE GOODS COULD CAUSE THE CA DEFICIT TO DECLINE.THEY ESTIMATE THAT THE REAL EXCHANGE RATE WOULD DEPRECIATE BETWEEN 14.7% TO 33.6% IF A CA DEFICIT EQUAL TO 5% OF GDP WERE ELIMINATED BY A CHANGE IN AGGREGATE DEMAND, AND BETWEEN 9.8% AND 25.5% IFELIMINATED BY A CHANGE IN THE SUPPLY OF TRADEABLE GOODS. THEY ESTIMATE THAT DEPRECIATION WOULD BE ACCOMPANIED BY A 3.9% TO 7.1% DECLINE IN THE TERMS OF TRADE. THE PREDICTED DOLLAR DEPRECIATION IS SO LARGE BECAUSE ABOUT THREE-QUARTERS OF U.S. OUTPUT IS NON-TRADEABLE, PRODUCTION CANNOT BE QUICKLY SHIFTED INTO TRADEABLE GOODS TO TAKE ADVANTAGE OF THE DEPRECIATION, AND IMPORT.

Economist Review

1. Maurice Obstfeld and Kenneth Rogoff:

Explicitly allow asset demand to influence the exchange rate, and they assume that assets from different countries are not perfect substitutes. In their model, a CA deficit would eventually decline because demand for U.S. assets is finite. Although an increase in the demand for U.S. assets would initially cause the dollar to appreciate, they argue, it would later depreciate to finance debt service (though it would remain above its pre-appreciation value). They estimate that a 15% decline in the dollar would be associated with a decline in the CA deficit equal to 1.4% of GDP.

2. Olivier Blanchard, Francesco Giavazzi, Filipa Sa

Economist Review

Edwards uses a similar model to simulate how much the dollar would depreciate from its 2004 level depending on different assumptions about the foreign demand for U.S. assets. Unlike Blanchard et al., he projects fairly rapid declines in the CA deficit and dollar in the future. Under his optimistic scenario, in which he assumes that the U.S. net debt will rise to 60% of GDP by 2010 and then remain constant, the CA deficit would peak at 7.3% of GDP in four years, before eventually declining to 3.2% of GDP (with most of the decline occurring in the first four years after the peak).

If U.S does not control on the import and depreciated dollar to almost 28% then U.S may face the rapid decline on the U.S CA deficits.

3. Sebastians Edwards:

Economist Review

Economists Roubini and Setser simulate what would happen to the net foreign debt over the next 10 years under three scenarios. In the first scenario,Imports and exports continue to grow at historical rates. The CA deficit would exceed by 12.8% from its current situation of GDP and the net foreign debt would exceed 80% of GDP by 2012.They estimate that the dollar would need to depreciate by about 10% from its 2004 level. All of these scenarios assume that relative interest rates remain similar to past values as the net foreign debt rises.If foreigners demanded higher interest rates, then this would feed through to a much larger CA deficit and debt path than simulated .

4. Nouriel Roubini and Brad Setser:

Economist Review

Economist Paul Krugman estimates that the dollar would need to depreciate by at least 35% from its 2005 value in real terms in the long run for the trade deficit to be reduced to zero . He looks for evidence of whether this depreciation will happen gradually or abruptly. For the depreciation to be smooth, Krugman argues that it must be anticipated by rational investors, in which case they would currently require a rate of return premium to hold U.S. assets (to offset the loss suffered from the future dollar depreciation). To determine how large the premium would have to be, he considers two hypothetical paths for the dollar. In one path, the dollar declines by 1.75% annually and net foreign debt peaks at 118% of GDP, or at least one-third of the total U.S. capital stock.

5. Paul Krugman:

Economist Review

Impacts of Trade Deficits –

by Farah Mazhar

Effects As usual in economics, there are several different views of trade deficits. Depending on who you talk to, they are

Bad, Good, Both (depending on the situation),Immaterial.

Impacts of Trade Deficits

Bad Impact:

Borrowing from abroad Selling off their capital Assets Long Term StrategiesFuture Production Labour Union


Good Impact

Good for United State Economy Far from hurting employee boost the US Employment


Both

If a trade deficit represents borrowing to finance current consumption rather than long-term investment, or results from inflationary pressure, or erode U.S. employment, then it's bad.

If a trade deficit fosters borrowing to finance long-term investment or reflects rising incomes, confidence, and investment—and doesn't hurt employment—then it's good


Immaterial

Rising Consumption Consumer want imported food, clothes and cars Successful economy


IMPACTS OF TRADE DEFICITS Impacts of Trade Deficits

US DOLLAR

• Panama • Ecuador • El Salvador • Guatemala• Bahamas• Cambodia and • Haiti

Impact on GDP

Most mainstream economists believe that because the current account deficit is offset by foreign investment in the United States, the effect on GDP is negligible. The security of the U.S. economy and the U.S. dollar make investments in U.S. productive capacity and in U.S. corporate and government securities quite attractive. So as long as the trade deficits are financed by foreign investment and the dollar is not overly weakened by them, then GDP will be fine.


WHAT STEPS SHOULD BE TAKEN BY U.S IN ORDER TO CONTROL THE

CURRENT SITUATION –

BY SYED ANWAR

THE FOLLOWING STEPS SHOULD BE TAKEN IN ORDER TO CONTROL THE

SITUATION

U.S have to focus on their net Exports.

Reduce the volume of high Imports.

Nationals have to save money in their local banks, in order to give boost to the economy.

U.S have to create demand for their Assets (such as U.S. Treasury securities). all around the globe.

U.S must reduce their large expenses which they are spending on the War.

U.S HAVE TO FOCUS ON THEIR NET EXPORTS

It is witnessed that in the past few years U.S has failed to create demand for their local product in the international market. Now, if they build some effective strategies in order to create the demand of the local product their net export will be increased in the near future.

REDUCE THE VOLUME OF HIGH IMPORTS

It is known that U.S locals are extravagant and hence the whole nation is considered as the spendthrift. In past few years U.S started to import foreign products heavily from different countries. By this very reason they are facing trade imbalances.

NATIONALS HAVE TO SAVE MONEY IN THEIR LOCAL BANKS, IN ORDER TO GIVE

BOOST TO THE ECONOMY

U.S are very much depending on the foreign investment and the locals are not saving the money in the National banks. Therefore U.S have to create awareness in the country to keep the money the money in the banks in order to give boost to the economy.

U.S HAVE TO CREATE DEMAND FOR THEIR ASSETS ALL AROUND THE

GLOBE.

A number of analysts are concerned that the Asian central banks would reduce their demand of U.S Assets. Unleashing an abrupt collapse in the value of Dollar. U.S should come up with some positive plans to over come on this challenge.

U.S MUST REDUCE THEIR LARGE EXPENSES WHICH THEY ARE

SPENDING ON THE WAR

At the moment U.S is spending a huge amount on the war which is being fought in the different countries. If U.S wants to reduce this C.A deficit then they must have to cut down the huge expenses which they are incurring in the Wars.

CONCLUDING REMARKS

Never in the history of modern economics has a large industrial country run current Account Deficit of the magnitude posted by the U.S since 2000. These development can be explained in the context of a portfolio model of the CA, where for a number of reasons- the end of the Cold War, foreign investor increase their net demand for U.S Assets.

U.S current account deficit

Economy & Finance

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