What Action Is Advised For Federal Government Officials to Take to Reduce the Current Account Deficit
There are policies which are commonly considered for reducing a current account deficit:
This is where the value of the currency against other currencies is reduced. When this is utilized, there is an increase in the price of imported items which will in turn decrease the demand for imports. At the same time, exports will become less expensive which will increase the demand for the exports. If it is assumed that the demand is relatively price “elastic,” it would be expected for a devaluation to improve the current account balance. However, it should be noted that the elasticity of demand for both exports and imports would be the prime determinate of whether this would improve that balance.
This is where the government reduces the aggregate demand by raising interest rates and/or by increasing taxes. This would result in the people having less money to spend, which in turn reduces the purchases of imports. Using deflation would also encourage manufacturers to reduce their costs, which will lead to being having more competitive exports. This will increase the demand for exports. However, this can conflict with other objectives. When there is lower Aggregate Demand, growth could fall causing a higher amount of unemployment. Governments usually would reject risking higher unemployment just for the reduction of a current account deficit.
3. Supply Side Policies
This can bring about improvements in the economy’s competitiveness. It can also assist exports in being more attractive. It can improve the current account balance, but this could take some time in order to see the desired results.
This is where increasing tariffs of quotas is used to reduce the amount of imports and improve the current account balance. However, this can often cause retaliation so that exports decrease. Also, it can lead to domestic industries becoming uncompetitive due to lack of incentive (Pettinger, n.d.).
Increasing the competitiveness of the country by decreasing prices and increasing quality in turn increases exports and reduces imports, which in turn reduces the trade deficit. Utilizing contractionary monetary and fiscal policies can result in reduced inflationary rates which can increase the competitiveness of exports globally. However, because this can reduce the employment level, it might best be used as a combination of contractionary fiscal policy and expansionary monetary policy. This policy combination should reduce interest rates while maintaining the employment level. Trade restrictions should result in improvements to the current account balance. However, this could also result in a reduction of the standard of living. Also, this does not increase the competitiveness of exports in the global market. And, the possibility of retaliation is far too high (Chapter 15, n.d.).
Manufacturing has been at the heart of the U.S. trade deficit for years. There is a deficit in manufacturing which has paralleled the trade deficit since 1967. Throughout that time, the manufacturing deficit has been roughly the same as the current account deficit. It would stand to reason that if the U.S. wished to reduce or eliminate the current account deficit, that there should be extreme attention paid to manufacturing. Manufacturing industries would need to increase exports and those goods which are import competitive for the current account balance to improve. To eradicate the current account deficit, it would require a minimum of a 30 percent increase of U.S. manufacturing output (Scott, 2001).
Chapter 15 Outline. (n.d.). Policies to Reduce the Current Account Deficit. Retrieved November 4, 2013 from http://www3.nd.edu/~cwilber/econ504/504book/outln15i.html
Pettinger, T.R. (n.d.). Policies to reduce a current account deficit. Retrieved November 4, 2013 from http://www.economicshelp.org/macroeconomics/bop/policies-to-reduce-deficit/
Scott, R.E. (February 7, 2001). Manufacturing Key to Reducing Trade Deficit. Retrieved November 4, 2013 from http://www.epi.org/publications/webfeatures_snapshots_ archive_01312001/
Current U.S. Deficit
Do you think the current U.S. deficit is a problem? If so, why so? If not, why not?
The current U.S. trade deficit is not a problem because the economy is getting stronger and stronger each day. It was reported by the Bureau of Economic Analysis that the trade deficit for the United States was at $539.514 billion in 2012 (Amadeo, 2013). The trade deficit numbers have been declining each year, which means the amount of exports are outweighing the amount of imported goods. A lower trade deficit is good for business in the U.S. because this means the number of jobs will increase and the goods and services are competitive. However, if the trade deficit was high and remained high, the long-term effects would be negative because the overall deficit would be financed by way of debt (Amadeo, 2013).
What actions would you advise federal government officials to take on this issue?
Since the U.S. is the main exporter of services such as intellectual property, travel-related services and financial services, I would advise government officials to cut back on foreign oil and petroleum products. According to the 2012 U.S. Census, America imported $313 billion in items such as crude oil, fuel oil, kerosene and natural gas. Government officials should develop more ways for Americans to become independent from foreign oil trade. Opening up more oil drilling sites in the U.S. would help combat some of the trade deficit issues over time.
Define and explain what the Current Account Deficit is.
The current account deficit can be described as the sum of the balance trade, net factor income and net transfer payments. In other words the sum of the exports minus imports of goods and services, add the net factor incomes like the interest and dividends, plus net payments such foreign aid (United States Current Account, 2013). The most important element the balanced of trade is the current account. According to the 2013 report recorded by the U.S. Bureau of Economic Analysis, the United States current account deficit is at 98893 USD Million during the second quarter. A country becomes a net debtor when its total imports of goods, services and transfers are larger than the country’s exports of these same factors.
Define and explain what a current account surplus is. When was the last time in the recent past when there was a current account surplus?
The current account surplus is linked in with trade surplus. Current account surplus is simply an imbalance in the nation’s balance of payments current account. This means the domestic country’s imports of goods and services are less than its exports of goods and services. Generally, this is a good situation for the domestic country. However, this could be a bad thing is the capital account fails to balance out the current account, then a surplus adds to a balance of payments surplus (United States Current Account, 2013). The last time there was a current surplus was seen during the second quarter this year. For instance, the current account deficit in the U.S. narrowed to 5.7% during the second quarter because there was a bigger income surplus and more exports were carried out (Stilwell, 2013).
Amadeo, K. (2013). The U.S. trade deficit. Retrieved from: http://useconomy.about.com/od/glossary/g/Current_Account.htm
United States Current Account, (2013). Trading economics: Actual data, forecast and calendar. Retrieved from: http://www.tradingeconomics.com/united-states/current-account
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