Write a Two-page paper double-spaced to answer the question cited below. Make su

Question

Write a Two-page paper double-spaced to answer the question cited below. Make sure to include all the references used at the end of your paper. Do not include any footnotes. Your definitions of all the economic terms used must be clear and precise. Your paper must emphasize all the relevant linkages and interrelationships between the different economic variables used in your answers.

During the 1980s, the U.S experienced “twin deficits” in the Current Account and Federal Budget. Since 1998 the U.S Current Account deficit has grown steadily along with rising government budget deficits.

Do Government Budget Deficits lead to Current Account Deficits? Identify other possible sources of the current account deficits. Do current account deficits necessarily indicate problems to the U.S economy?

Explanation / Answer

The U.S. trade deficit is the result of a net inflow of capital to the United States from the rest of the world. Because of our stable and relatively free domestic market, we remain the world’s most popular destination for foreign investment. We have become a net importer of capital because Americans do not save enough to finance all the available investment opportunities in our economy. This inflow of capital from abroad allows us to pay for imports over and above what we export.

In other words, the trade deficit is simply a mirror reflection of the larger macroeconomic reality that investment in the United States exceeds domestic savings. If we want to change the U.S. trade deficit we must change the rate at which Americans save and invest.

The government will increase its borrowings due to increase in budget deficit, this increase the rate of interest and will increase foreigncapital inflow. This results cheaper imports and expensive exports. This would lead merchandise trade deficit. ... This leads increase in foreign imports which worsens trade deficit.

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