Us Current Account Analysis

The U.S. Balance of payments: Current Account deficit

Its history, current state and improvement?

The U.S. economy is the largest economy in the world with the GDP in purchasing power parity that equals to $10.99 trillion, growth rate of 3.1%, and GDP per capita of $37, 800 (2004 est.), [1].

However, it is an historical fact that the large amount of time the U.S. economy was experiencing the balance of payments' deficits. How come that economic success may go hand by hand with the Current Account or Capital Account deficit? What are the recent actions of the U.S. government to improve the existing situation and are they really effective? Let's start from the very beginning.

Balance of payments is an account that represents all the transactions measured in receipts and payments between a given country and all other countries. It consists of three additional parts: Current Account (exports and imports of goods and services plus investment incomes such as rents, interest, and profits), Capital Account (country's investments abroad and foreign investments into the country), and Balancing account (it's represented by country's official reserves such as gold, foreign and domestic currency reserves, etc.), [2]. The overall economic performance is usually evaluated based on the data included in the Balance of Payments.

The U.S. economic history is used to be represented in five main stages, [2]:

I. 1770-1870 Ð'- The U.S. is a young debtor nation that is unable to produce much by itself, thus imports a lot, has the CA deficit, and borrows money from abroad which leads to KA surplus as the foreign capital flows into the country are really huge. Main investment flows go to the farming, roads, railroads, canals, and cattle rearing.

II. 1870-1920 Ð'- The U.S. is a mature debtor nation with the CA deficit as the money borrowed at the stage I should be paid back. However, the trade balance (Exports - Imports) is in the surplus, production grows rapidly.

III. 1920-1945 Ð'- The U.S. is a young creditor nation that experiences a huge CA surplus due to the large export volumes (in and after the World War I period). It also has a KA deficit that occurs from capital outflows to the foreign countries, the U.S. invests in the Europe after war reconstruction.

IV. 1945-1980 Ð'- The U.S. is a mature creditor nation with the CA deficit that comes from a large trade balance deficit and KA deficit as capital flows from the U.S. to the Japan and Europe stabilizing their economies after the World War II.

V. 1980-Nowadays Ð'- The U.S. is experiencing a growing CA deficit that comes from the growing trade deficit. The U.S. is importing a lot due to the high incomes and high domestic production costs which make the trade deficit worsen. To serve this huge trade deficit that has been equal to $536 billions in 2003 and equals to approximately $423 by the results of three last quarters of 2004, the U.S. lends money from abroad. It is dependent heavily on the foreign capital inflows. The KA transactions estimated in 2003 and 2004 show that the KA was in the surplus in 2003 of $536 ($580-statistical discrepancy of $34 billion) and tends to be higher than already achieved $741 billion in 2004, [3].

To cope with the trade deficit and improve the situation, the U.S. started to depreciate its currency. Owing to the War in Iraq that costs a huge amount of money, capital flows out from the U.S. This money needs to be exchanged in the international exchange market Ð'- dollar loses its value. The U.S. keeps buying foreign assets and bonds, investing money abroad which also leads to a depreciation of dollar. Since February 2002 the real value of the dollar fell by 19.1% relative to the other 7 currencies Ð'- currencies of the U.S. main trade partners (Canada, Japan, Germany, France, Italy, and the United Kingdom), [4].

However, as a recent research of the Federal Reserve Bank of San Francisco showed, this depreciation of the dollar will not lead to the 19.1% rise in import prices (although they have risen up to 7.6%, economists predict that they will not be higher) and overall U.S. consumer prices. This means that the harmful effect of the depreciation is lower. Which means, in its turn that the positive effect of depreciation is much more likely to increase. This means that production costs will become relatively lower in the U.S. which will bring the price competitiveness to the U.S. producers in the international markets; U.S. export volumes