the US trade balance
Filed in archive Global Economy by tj on September 22, 2003
The authors first display the proportions of the account deficit reaching 5% of GDP:
"I JUST think it's a meaningless concept. That was the verdict of Paul O'Neill, George Bush's plain-spoken first Treasury secretary, on the current-account deficit. Mr O'Neill reckoned it was silly to worry about external imbalances in a global economy where capital flows freely. Foreigners, he argued, put their money into America because it offered the best risk-adjusted returns. A current-account deficit was merely the accounting consequence of these capital inflows."And than goes ahead finding ways out of the dilemma:
"Some of the recent rise may be a statistical quirk. According to official numbers, the world as a whole runs a current-account deficit with itself, and one that has risen sharply since 1997. Since the world does not, as yet, trade with Mars, the numbers must be wrong, so some of America's current-account deficit may be more apparent than real. But not all of the recent rise, or even most of it, can be explained this way."
"Another study at the IMF found only 12 episodes since 1973 where industrial countries have run a deficit of over 4% of GDP for more than three years in a row. All of the countries involved were relatively small and open economies."
"Can America afford this kind of indebtedness? That depends on the interest rate it must pay. So far, it has got away lightly. Until 2001, more income was generated by America's investments abroad than was paid out from the United States to foreign investors, even though the country became a net debtor in the mid-1980s. Even in 2002, America's net payments on foreign investments were less than $4 billion, a relative trifle."
"...a fall in the exchange rate improves the trade balance in two stages. First, the cheaper dollar increases the relative price of Japanese cars, French wines and Italian holidays. Cars from Detroit, chardonnay from California or trips to DisneyWorld, in contrast, become relatively less expensive. Second, this shift in relative prices encourages Americans to spend less on imports while boosting American exports."
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