• Uncategorized

US Current Account Deficit

USCurrent Account Deficit

Acurrent account balance is an important indicator of the economicposition of a country. The current account measures the outflows andinflows of commodities, services, as well as investment outcomes. Thebalance on the current account may either be positive or negative,where a negative balance shows that a nation is a net borrower whilea positive balance depicts that a nation is a net lender, or itsoutflows exceed the inflows. The United States have continuouslyexperienced current account deficits starting from the early 1980s(Gerard46).The current account deficit in the United States has grown due to anincrease in the real interest rates in the country. The expandingfederal budget deficit has resulted in an increase in the interestrates in an attempt to keep the dollar strong. Besides, anotherreason for the bulging current account deficit for the nation is theU.S. industries having weak competitiveness. However, there arevarious possible solutions that can be used to reduce the U.S.current account deficit. The following paragraphs discuss feasibleways of correcting the current account deficit of the United States.

PossibleRemedy to Current Account Deficit

Devaluation

Oneof the possible remedies that can be used in reducing the currentaccount deficit is devaluation. This approach involves mitigating thevalue of the U.S. currency against other international currencies.The Marshall Learner Condition argues that the devaluation ofcurrency would have the impact of improving the current accountbalance. However, the claim is based on the ground that the combinedelasticity’s of demand for exports, as well as imports, should bemore than one. The argument is supported by the reasoning that theimpact on the current account does not depend on the quantity ofexports, but on the entire value of exports and imports (Gerard62).During the short-term, the demand for exports and imports isconsidered to be inelastic. Thus, following a devaluation of thecurrency, the current accounts first of all, worsens before itimproves. With time, the demand for exports and imports becomes moreprice elastic, which has the impact of improving the current accountbalance.

DeflationaryPolicies

Policiesthat aim at mitigating inflation as well as reducing the growth ofaggregate demand can also be utilized in reducing the current accountdeficit. These policies include the tightening of monetary or fiscalpolicy. These policies are presented below.

MonetaryPolicy

Themonetary policy involves the use of the money supply to impact theeconomy. Tight monetary policy can be achieved through increasing theinterest rates. Higher rates of interest rates increase the cost ofborrowing since loan becomes costly to repay. An increase in interestrates also leaves individuals with fewer resources to spend (Uttinget al. 84).A reduction in the amount of resources held by people helps inimproving the current account balance since individuals spend littleor limited resources on the consumption of imports. Besides, anincrease in the rates of interest would result in a decrease inaggregate demand, which leads to a reduction in the economic growth.This would have the effect of mitigating inflation and assist inmaking the U.S. exports more competitive. Furthermore, deflationarypolicies would also have the impact of putting pressure onmanufacturers to decrease costs such a move would result in morecompetitive exports, which would have a long-term impact ofincreasing exports. The augment in exports, in the long run, wouldhelp in correcting the current account deficit.

Evaluationof the Monetary Policy in Correcting Current Account Deficit

Theuse of the monetary policy has two key conflicting impacts higherrates of interest would reduce imports’ spending and the higherrates would lead to appreciation in the exchange rate. Although thereduction in spending on imports would improve the current account,the appreciation in the exchange rates would negatively impact thecurrent account. The use of monetary policy in correcting the currentaccount deficit would lead to hot resource flows, making exports lesscompetitive while the imports would become more attractive.

FiscalPolicy

Thefiscal policy focuses on the use of government spending as well astaxation to control the economy. In correcting the current accountdeficit, the deflationary fiscal policy can be applied. This can beachieved through increasing taxation for instance, raising incometax. An augment in income tax would mean that consumers would be leftwith a few resources at their exposure for spending. This would havethe effect of decreasing the money that would be allocated tospending on imports. Reduced importation would positively influencethe current account (Uttinget al. 94).The use of deflationary fiscal policy in correcting the currentaccount deficit is advantageous because it does not have a negativeeffect on the exchange rate. Besides, an increase in taxation wouldhelp the government in obtaining additional revenues that can beutilized for development. Nevertheless, the deflationary fiscalpolicy can also be disadvantageous since it may tend to affect othermacroeconomic objectives. For instance, the policy may result indecreased aggregate demand, which may cause an increase in theunemployment rate and a deceleration in development.

CompetitivenessPolicies

Thelack of competitiveness of the U.S. industries has been considered asa key contributor to the growing current account deficit in theUnited States. Thus, policies that can increase the aggressiveness ofthe U.S. companies can be considered as a remedy towards correctingthe current account deficit. However, the policies that the firmsshould engage should not be price-driven. One such policy that thegovernment can introduce is allocating more resources to education sothat a lot of individuals can benefit from enhanced training thatwould be critical in the leadership and productivity of theindustries. Besides, the government should focus on offering taxrelief for capital investments as well as subsidizing the involvementin research and development initiatives (Méjean et al. 58). Thiswould aid in increasing the skills and innovation in the U.S.companies, which would enhance their competitiveness. The competitivepolicies would help the organizations to produce commodities andservices that are attractive both locally and internationally.Therefore, the U.S. consumers would import less since they would becontented with the local services and commodities. Hence, the currentaccount would improve.

Prosand Cons of Devaluation of Domestic Currency to Correct Trade Deficit

Pros

Oneof the advantages of the devaluation of domestic currency in anattempt to correct a trade deficit is that it makes exports to becomecheaper as well as competitive to the foreign consumers. This iscritical to the economy because it can act as a boost to the localmarket in the export sector since it can create jobs, which can aidin stimulating the economy. Another benefit is that it helps inincreasing the level of exports. This aspect is essential to theeconomy because it assists in improving the current account deficit.Alternatively, the increase in exports can augment the aggregatedemand, which can result in enhanced rates of economic growth.

Cons

Althoughdevaluation of currency is beneficial in growing the revenues of thedomestic market, these earnings can, in the long run, have no impactin correcting a trade deficit. For instance, in case high profitsbecome realized by firms emanating from attractiveness of exports dueto devaluation, the entities may become idle providing lesscompetition (Gerard 72). This may result in no change in the tradebalance in the long run. Also, devaluation of currency is likely toresult in expensive imports. As a result, the devaluation would causeinflation. Furthermore, devaluation can have the effect of mitigatingthe purchasing power of consumers abroad.

Conclusion

Fromthe discussion, it is apparent that the United States current accountdeficit has been indicating an increasing trend. However, there aredifferent possible remedies that can be utilized in correcting theU.S. current account deficit. These solutions include the devaluationof the U.S. currency, using deflationary policies, as well ascompetitive policies. The government should focus on offering taxrelief for capital investments as well as subsidizing the involvementin research and development initiatives. This would aid in increasingthe skills and innovation in the U.S. companies, which would enhancetheir competitiveness. Devaluation of currency in an attempt tocorrect trade deficit may make exports attractive, create jobs, andstimulate the economy. However, it may also affect an economyadversely by causing inflation and eliminating firms’competitiveness.

WorksCited

Gerard,Caprio. Evidenceand Impact of Financial Globalization.New York: Wiley &amp Sons, 2012. Print.

Méjean,Isabelle, Pau Rabanal, and Damiano Sandri. CurrentAccount Rebalancing and Real Exchange Rate Adjustment between theU.s. and Emerging Asia.Washington, D.C.: International Monetary Fund, 2011. Print.

Utting,Peter, Shahra Razavi, and Buchholz R. V. Varghese. TheGlobal Crisis and Transformative Social Change.Basingstoke: Palgrave Macmillan, 2012. Print.