•The USA runs a huge current account deficit year after year. Trump, whose knowl
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Question
•The USA runs a huge current account deficit year after year. Trump, whose knowledge of economics is very limited, finds this intolerable. However, the USA runs a capital/financial account surplus as foreigners invest in US financial assets.
As an international economist, write a short answer/paper (about 800 words minimum), describing how this works from a balance of payments point of view, and answering few questions in it.
•1- Can Trump change this situation? If yes, how? If no, why not?
•2- How is it that the USD has largely remained stable despite this current account deficit? Shouldn’t it depreciate?
Explanation / Answer
Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).
The US current account deficit increased to USD 123.1 billion or 2.6 percent of GDP in the second quarter of 2017 from a downwardly USD 113.5 billion in the first quarter or 2.4 percent of GDP. It is the biggest current account gap since the last three months of 2008 as secondary income deficit increased by USD 7.5 billion to USD 33 billion; the primary income surplus decreased USD 2.9 billion to USD 47.2 billion; and goods deficit rose by USD 1.6 billion to USD 64.09 billion. Current Account in the United States averaged -47054.44 USD Million from 1960 until 2017, reaching an all time high of 9957 USD Million in the first quarter of 1991 and a record low of -215769 USD Million in the third quarter of 2006.
As the question says i dont think trump can change the situation as there is a huge current account deficit from 2008 and it is increasing year by year . USA is not in a state to devalue its currency as compared to other currency. USA cannot change its monetary policy they cannot increase there interest rates.Higher interest rates will increase the cost of debt and mortgage repayments and leave people with less money to spend. Therefore, this will reduce their consumption of imports, improving the current account.Also, higher interest rates will cause a fall in AD and therefore reduce economic growth. This will reduce inflation and help to make USA exports more competitive. Deflationary policies will also put pressure on manufacturers to reduce costs, and this will lead to more competitive exports, and so exports may increase in the long run because of this effect.
Internal devaluation has to be done which is also not possible.
Answer to second question is that usd is not going to depreciate because USA ended its expansive monetary policy as the economy improved. It stopped adding to the money supply. This constrained the supply of the dollar and increased its value.The Fed also raised interest rates in December 2015. This strengthened the value of the dollar. It meant that U.S. Treasury notes would attract higher interest rates in the short-term. That increased the demand for dollars. Savers earned a higher rate of return on dollar deposits than on euro deposits, which paid lower interest rates.Second, the European Central Bank lowered the value of the euro by doing the opposite. Political instability in the European Union also weakened the euro. Dollar automatically strengthens when the euro weakens.Finally, forex traders intensified the strength of the dollar. They used leverage to further weaken the euro and strengthen the dollar.
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