At the dawn of the previous century, the economy of the United States of America faced the issue of “twin deficits” regarding its current account and the entire federal budget. However, the country’s current account deficit has constantly been expanding since 1998. The government budget deficits were also growing rapidly at that moment. The following paper is intended to discuss various questions as to the budget and current account deficits of the USA.
Do Government Budget Deficits lead to Current Account Deficits?
Discussing the economy of the United States of America, there is no doubt that its government budget deficits lead to that of the current account. It would be proper to mention that every nation’s current account balance is impacted by a variety of external issues such as currency exchange rates, international trading policies, reserves of forex, competitiveness among manufacturers, inflation, and many other factors that regulate any state’s economy (Ferrero 278). Therefore, when the amount of money collected by the Commonwealth’s treasury workers is constantly decreasing, there is a possibility that the price of exported goods is likely to diminish as well. However, the payments for imported materials might not follow the same tendency (Ferrero 277). As a result, the phenomena of the current account deficit might occur.
Identify Other Possible Sources of the Current Accounts Deficits
As it is mentioned in the previous paragraph, there is a wide range of factors that have a significant influence on current account deficits. For instance, if the USA’s currency changes its value, companies who are responsible for export might disregard the necessity to make the prices of various goods delivered to other Commonwealths higher. In turn, when particular trading policies change in international markets, the benefits of various countries drawn from them are unknown at the first moment (Cebula 32). It is necessary to adapt to any conditions when they are precisely analyzed. Otherwise, certain actions might not be beneficial for the budget of the country. Transnational competitiveness is another essential source of current account deficits (Cebula 32). Once foreign companies find methods to produce their own goods at lower prices than the ones offered by other states, they are likely to interrupt their collaboration with stable importers.
Do Current Account Deficits Necessarily Indicate Problems to the U.S. Economy?
Nowadays, the American economy is unlikely to suffer from possible current account deficits. It is necessary to mention that the country exports a tremendous amount of oil products of a high value on the international market (Kumhof and Laxton 2063). Moreover, it delivers high-quality equipment and tools to some European states. As stated by Kumhof and Laxton, “the long run current account deterioration equals almost 75% for a large economy such as the United States, and almost 100% for a small open economy” (2078). Even if the quantity of finances earned by trading is decreased, the USA’s economy will not have any issues as the country has enough means to maintain its manufacturing processes profitably, regardless of foreign demands.
Government budget deficits lead to that of the current account of any country if its trading traffic is not optimized properly. Despite this factor, such issues as forex reserves, competitiveness among manufacturers, inflation, exchange rate, and other indicators impact any state’s current account deficits. It would be proper to mention that current account deficits are unlikely to cause any harm to the economy of the United States of America as it regulates almost every market in the world. Perhaps, such changes are significant for developing countries. However, the budget of America will always expand as its export goods are in great demand abroad.
Cebula, Richard J. “Impact of Federal Government Budget Deficits on the Longer Term Real Interest Rate in the U.S.: Evidence Using Annual and Quarterly Data, 1960–2013.” Applied Economics Quarterly, vol. 60, no. 1, 2014, pp. 23–40.
Ferrero, Andrea. “House Price Booms, Current Account Deficits, and Low Interest Rates.” SSRN Electronic Journal, vol. 47, no. 1, 2015, pp. 261–293.
Kumhof, Michael, and Douglas Laxton. “Fiscal Deficits and Current Account Deficits.” Journal of Economic Dynamics and Control, vol. 37, no. 10, 2013, pp. 2062–2082.