By the term trade deficits it is obvious that US is consuming more than its gross output. Thus it could be mentioned that the country is investing more than saving. Investment on other hand an asset on a long term basis and is a continuous process. Thus it is logical the US should be running a merchandise trade deficit year after year since the early 1980s. In this respect a current account deficit is related to the negative impact of deficit export and deficit net income from foreign countries. (Edelman, 2008)
This is indeed a problem because this means that a country is not able to produce or market enough materials or services to export internationally. This also signifies that the total imports are higher than the total export amount. This means the country with a current account deficit is moving towards as state of economic structure where there would be more debts payable than receivable. (Fletcher, 2008) This creates an essence of negative market growth where the local currency is deemed to be devalued and thus investments in-house would loose cost advantage whereas overseas investments would gain. However, at the end measures the current account deficit would create as slowdown of economy as there would be more credit turnover in the international market structure. (Edelman, 2008)
However, the trend of the international investment position of the U.S. could be termed as a problematic situation because with the balance of payment being negative there lays a subtle chance of market crash and even probability of deflation. The example of East Asia could be enumerated in this situation where it was found that the credit volumes of the economy of those countries lead to the massive market crash. (Fletcher, 2008)
It would be relevant to mention that the current account is an extremely important tool that can determine the entire business cycle of a country as current account can be determined in according to trade balance as the difference of import and export of tangible goods and services like consulting and legal. Current account is also instrumental in determining the overseas factor incomes like dividend and income along with the net overseas Unilateral Transfers like gifts, grants, and aids. (Podolski, 2006)
In this respect the Current account can be enumerated as Balance of Payments = Reserve Account change + Capital Account + Current Account where the balance of payment signifies the country’s net financial inflow. If the Reserve account is marginalized it could be stated that any impact on the current account would ultimately alter the end result of the net financial inflow and vice versa. (Deb, 2006) The BOP or balance of payment refers to the specific measure that is used to calculate the payment between countries. Within a specified time period it is used to act as a summary of economic transaction of a country in the international arena.
Total imports and exports of goods, financial transfers, financial capital and services are instrumental for determination of this balance of payment. (Edelman, 2008) As for United States, it makes the adjustment of balance of payment by maintaining the official reserve at a negligible margin. As a result even if there are deficits in the capital or current account there would be no affect on the official reserve as it is maintained at a virtually zero level.
Reference:
Deb, J. (2006). Introduction to International Trade. Auckland: ABP Ltd.
Edelman, S. (2008). Evaluation Techniques in International Business Management; Bloemfontein: ABP Ltd.
Fletcher, R. (2008). Principals: Beliefs and Knowledge; Believing and Knowing. Dunedin: Howard & Price.
Podolski, V. (2006). Public Perception of Perceptions: An Approach towards Global Economics. Wellington: IBL & Alliance Ltd.