Deficit - Essay Example

Deficit Deficit A deficit or a surplus is the most commonly used term when describing the balance of payments. The balanceof payments is the documentation of economic transactions between the residents of a country and the rest of the world. A deficit in the current account is a situation where a country’s value of the goods and services imported exceed the value of goods and services exported. A deficit is usually subtracted from the Gross Domestic Product. The ever rising debt in the United States’ current account balance has elicited numerous debates from economists all over the world.

In this paper, I will summarize and critically evaluate the main positions provided on this in Carbaughs Chapter 10 and the Deutsche Bank Research. From the research paper by the Deutsche Bank Research, it is clear that the external deficit is a consequence between the Gross Domestic Product in the USA and abroad (Fiorentini, 2012). The U.S. has a faster-growing economy than the other industrialized nations. The U.S. is the only industrial state with a growing population unlike the festering and dwindling populations of the other industrial countries.

The other demographic factor that is to the advantage of USA is that its aging population is growing at a slower pace than its counterparts. These two factors coupled up with increased productivity have led to a fast growing economy in the US. The increased productivity in the economy makes the current account deficits affordable. The increased production is usually as a result of improved technology and efficiency. On the other hand, a rapid growth in the nation’s economy causes its residents to import more while the slow growth in the other states hinders its exports.

At the end of the day, there are more imports than exports that result in a deficit in the balance of payments. If these deficits are arising from economic growth, it means that the remedy would be a recession that would bring more harm than good. The state would rather have a deficit than a retrogressing economy Secondly, even if the differential economic growth were ignored, the U.S. would still have deficits in its balance of payment because of its systems and structures. For instance, the U.S. market is more open and does not put a lot restrictive policies on importation which allows residents of the USA to easily import goods and services.

In the long run, the quantity of imports supersedes the exports. There has also been a move by the government in the recent past to create free trade areas and make free trade agreements with countries from both American and Asian states such as India and China. In such contracts services such as manufacturing are usually outsourced and the finished products are returned to the USA with a higher cost. This is tantamount to importation over exportation. The question as to whether the United States can sustain its current account deficit over the foreseeable future depends on whether foreigners are willing to increase their investments in the U.S. (Carbaugh, 2011).

The United States has been identified by foreigners as one of the safest investment hubs characterized by unwavering political and pecuniary environments, fast growing labor reserves, and protected property rights. Many foreign investors are even willing to make investments in the U.S. even if that will yield small returns because of the low risks involved. On the contrary, the United States will not undertake investments in foreign countries that offer higher gains. The U.S. will continue to sustain the deficit as long as the foreign investors are willing to cast their net in the United States.

Most economists in the United States have argued that the only way the negative balance of payment would be offset is through depreciation of the dollar. This argument is hinged on the fact that a depreciating dollar will encourage exports and limit imports as one would require more dollars to imports goods. Depreciation of the dollar may also put at risk the financing of the deficits because of reduced net inflow of foreign investment. The other fear that has gripped some economists in the U.S. is the fear of people losing their jobs if the current deficit continues.

It is a fact that when an economy has a high current account deficits people may lose jobs in particular sectors but, it is a not a danger to the whole economy (Mann, 1999). The most affected industries may be those that will be affected by increased imports or by outsourcing. This issue should be looked at as a spectrum involving several other factors. A current account deficit is matched by equal flow of foreign funds, which finances employment - sustaining investment spending that would not otherwise occur (Carbaugh, 2011).

When viewed from this angle the current account deficits create employment opportunities in an economy. Such employment prospects arise from credit sensitive quarters such as housing and the service industry. If the current account deficit is viewed as a net inflow of foreign investment, one would quickly understand that the deficit can be sustained as long as the inflow exists. The rising deficit in the current accounts has majorly been sustained from borrowing from or selling of assets to other nations.

Normally, if a country increases its borrowing from abroad, the cost of repaying the debts is usually higher due to the interest rates charged. However, the United States has surprisingly earned more from their investments abroad than foreigners earn from the U.S.A. The US enjoys borrowing because it is painless and due to the fact that what they invest, it is very rewarding because of the risks involved. On the other hand, the foreign investors are more than willing to take low return investments.

In view of the above, I can without doubt, assert that the current economic position of the U.S.A. allows it to safely run persistent external deficits in the current balance account. Trying to curb this rising deficit may be a difficult task. Needless to say, the current deficit has more merits to the US economy. There are still no immediate solutions to the problems because there is no known economic solution to the situation. There are bigger problems that the country will have to deal with, which include rising costs of healthcare, oil, and retirement benefits for its aging population.

The deficit will persist as long as the contributing factors exist. . References Carbaugh, R. J. (2011). International economics. Mason, OH: South-Western Cengage Learning. Fiorentini, R., & Montani, G. (2012). The new global political economy: From crisis to supranational integration. Cheltenham, Glos, UK: Edward Elgar. Karczmar, M. (2004). The US balance of payments: widespread misconceptions and exaggerated worries. Deutsche Bank Research. http://www. cumber.com/special/Current_Issues. pdf. Mann, C. L. (1999). Is the US trade deficit sustainable?. Washington, DC: Inst.

for Internat. Economics.