Can the United States Continue to Run Current Account Deficits Indefinitely?

Assignment Instructions

In Chapter 10, Carbaugh Asks, “Can the United States Continue to Run Current Account Deficits Indefinitely?” Since in the long term, the obvious answer is no, perhaps the question should be rephrased to ask the following:

• Does the United States’ unique position in the world economy allow the country to safely run persistent external deficits?
• Can persistent U.S. deficits in the current and payments accounts be adjusted without bringing about economic recession or crisis?

In a 4-6 page (12-point font, double-spaced) essay, summarize and critically evaluate the main positions provided on this in Carbaugh’s Chapter 10 and the Deutsche Bank Research piece also assigned as reading for this module. + references APA style

Sample Answer

According to Deutsche Bank Research (2004), there is a great disparity in economic growth between the United States and its major trading partners.  The United States exhibits a stronger economic growth than its trading partners. The slower economic growth overseas impedes exports by the United States, and this generates increased demand for imports. Over the past 20 years, the United States has experienced a stronger economic growth than other industrial nations except in 1991 and 2001 when it had shallow downturns. This resulted into rise in trade accompanied by an increase in the current account deficits. It is difficult to predict how long the current account deficits will continue to rise, and Carbaugh (2012) is curious about whether the United States can continue to run the current account deficits indefinitely.

The United States can safely run persistent external deficit due to its unique position in the global economy. Due to strong economic growth in the country, many foreigners will be attracted to purchase American assets. Investment opportunities in a country greatly influence economic growth, and so long as there are enough investment opportunities for foreign investors, they will act as a persistent source of funds for America. Since investment opportunities in the United States are not likely to decline any soon, it is clear that the current account deficits will still prevail (Deutsche Bank Research, 2004.

Another reason why the United States can continue to run current account deficits indefinitely is international trade that makes the country to continue outsourcing its products. Low exports and increased demand for imports makes the United States income elasticity of exports to be lower that income elasticity of imports. This tends to expand the United States trade deficits so long as the country continues to outsource its products. Additionally, due to spreading globalization, financial markets offer deep and high liquid pool of savings to the country. This encourages foreign investors to supply more money to the United States without interest rates. The current account deficits become readily fundable in such a case. According to Carbaugh (2012), the fact that foreign investors will continue to furnish the United States with money indicates that the United States can continue to run its current account deficits indefinitely.

Since the United States’ can continue to run its current account deficits indefinitely, it is clear that any adjustment in the persistent external deficits accounts will automatically result into economic recession or crisis. The United States economy is highly impacted by current and payment accounts. These two accounts are the source of growth of foreign ownership of national capital stock which eventually raises national the country’s income that is taken back abroad in form of interest rates and dividends. In this manner, the United States manages to repay the amount of money they had borrowed from abroad (Carbaugh, 2012). If adjustments are made to the country’s current and payment accounts, the United States will not be in a position to repay borrowed in form of interest rates and dividends. This will make foreign investors to lose confidence in the United States and they will stop investing in the country. The end result will be economic recession or crisis characterized by sudden decline in the value of dollar and a large increase in the United States interest rates.

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