Current Account Deficit

Current Account Deficit

A current account deficit occurs in a situation where a country’s total of imports exceeds the total of the exports. When such a situation occurs, the country is said to be indebted to the other countries in the world. The United States recorded a deficit of up to $127 billion in the last three months of Year 2010. The United States is the most important country in the world in international trade. For many years, it has been the leading the world in imports and at the same time maintaining top three positions as exporters of the world. Among the major exports are machinery and equipment. The rest include industrial commodities, automobile, spare parts and diverse foods. The major U.S. imports are different types of fuels, machinery and equipment for production. The major trading associate countries are Canada, European Union countries, Mexico, China and Japan (Summers 43).

From the Year 1989, the current account deficit of the United States has widened to up to 7% of GDP in 2006 (Lenz, Monroe & Parsell 47). New observations show that in spite of this wide gap, current account deficits are being controlled by positive valuation of the assets. U.S. assets abroad are increasing in value as compared to the domestic assets owned by foreign investors. This then shows that net foreign assets in U.S are not declining concurrently with current account deficits. Unfortunately, the recent records show that the net foreign assets are declining. In 2008, the decline was more than two trillion dollars. This has been caused by low performance of domestic owning of foreign assets to foreign investors owning domestic assets.

The current account deficit is a problem to US economy. It is now about 5% of the gross domestic product of the country. For many countries, this would get their attention. For example, the European Union forbids its members to have more than 3% deficit of their GDP (Barschel 114). A deficit shows that there are lesser funds to pay debts. This affects the economy of the country because it cannot afford to pay debts to other countries. This is accompanied by reduction of the value of currency. Another disadvantage of current account deficit is investors from abroad might be discouraged by the rate of deficit and decide to take away their investments.

There are certain ways that the government can embrace to curb the deficit. An upward shift in the currency value of a nation compared to others will make a nation’s exports become less competitive and make imports reduce their expense, and therefore it will rectify a current account surplus. When the contrary is noted, that is when the nation’s currency falls in comparison to that of other nations, its citizens find it harder to purchase imports and increases the competitiveness of their exports, therefore aiding in reducing the deficit. This is a gradual process so it does not solve the problem immediately (Hauke, 2007). If the shift of the currency value would be expressed in a graph, an upward shift should show a movement to the graph towards the right. A downward shift should show movement of the graph towards the left.

The government could also adjust internal prices and demand. This can be done through the rigid gold standard. This is changing some aspect of the economy. The country can decide to remove the gold from the economy. This will cause a loss of gold hence deflation. This means there will be a reduction in the prices of commodities making exports competitive. It will also make the imports less competitive. Therefore, there will more inflow from exports than the money used to pay imports. This will reduce the country’s deficit in the current account (Lenz, Monroe & Bruce, 1992). Reducing the demand of the citizens will contribute because the imports will reduce. The commodities imported could be increased by the great demand of the citizens. If it is possible and applicable, the citizens should be encouraged to use homemade commodities where possible so that the rate of imports is reduced. These methods could assist to reduce deficit in the current account.

Works Cited

Barschel, Hauke. The U.S. current account deficit- whose problem is it? A short overview. California, CA: Routledge Publishers. 2007. Print.

Lenz, Allen, Hunter Monroe and Bruce Parsell. Narrowing the U.S. current account deficit: a sectoral assessment. Iowa, IA: Springer Publisher 1992.

Summers, Lawrence H. The US current account deficit and the global economy. Washington, D.C: Per Jacobson Foundation, 2004. Print.

Last Completed Projects

Are you looking for a similar paper or any other quality academic essay? Then look no further. Our research paper writing service is what you require. Our team of experienced writers is on standby to deliver to you an original paper as per your specified instructions with zero plagiarism guaranteed. This is the perfect way you can prepare your own unique academic paper and score the grades you deserve.

Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.

[order_calculator]