Current Account Deficit

Topics: Economics, Investment, Macroeconomics Pages: 2 (608 words) Published: February 22, 2013
According to CBO, the main causes of the U.S. Trade deficit are in factors affecting international capital flows. Those factors are a long decline in saving, fluctuations in business cycle, and relatively attractive investment opportunities in the U.S. Since the 1980s, gross saving fell resulted to the widening gap between supply of saving and demand for domestic investment. In open economy Saving = Investment + Current Account, since there were not enough saving for the investment demand, capital inflows from other countries allowed domestic investment to exceed saving, also created a trade deficit. The trade deficit helped domestic consumption and investment to exceed domestic production. The long expansion of business cycle in the 1990s than usual resulted in the high demand for investment and with the long contracting saving rate, the increased foreign capital produced more current account deficits. The low saving rate caused the interest rate to rise combined with the economic problems in other countries made the United State attractive place for investment to international investors, contributed to more current-account deficits. Gross saving is private saving plus government saving. After the great depression and the wars, federal government began to pay off the debts and its saving had declined since then for most of the times. Private saving has been up and down since the great depression but mostly down. The probable reasons are that people gained from land investment and corporate stocks which have made people wealthier and more likely to spend money than save. Another reason is that people who received medicare and social security are elderly and tend to save less. Also the development of new credit vehicles, for example credit cards have made consumption easier. Inflow of capital from abroad has a cost, interest on debt must be paid to foreigners, the profits and dividends must be paid to foreigners who invested in U.S. Equities. However the cost...
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