The United States imports more than she exports. When imports are greater than exports, a trade deficit like the one shown on the graph results. How does the United States routinely run a trade deficit?
The econ 101 answer is that foreign investors buy stock, bonds, and government T-bills in the United States to counter balance the out flow of money going to buy imports. So the money going out equals the money coming in to buy our assets. In other words, were selling America.
The United States has a low rate of national savings (NS = Y - C - G). Since the U. S. has a high rate of spending, this infers a low savings rate and a high flow of capital inflows to finance the spending. In theory, the USD should depreciate and foreign goods will become more expensive and the flow would reverse. It is my opinion, that as long as the United States has a stable government that will honor its contracts and maintains relatively high interest rates, the U. S. will continually run a trade deficit.
So what accounts for the decrease in amount of deficit in the years 94-95 and 00-01? Were imports decreased or were foreign investors more optimistic? and if they WERE more optmistic, what led them to be?
ReplyDeleteI think interest rates were relatively higher in the Asian countries than in the US so there was a net capital outflow of money...If public saving (T-G) increases, there might be less need to issue T-Bills to cover our spending...I don't really know...by the way, your mom says hi...
ReplyDelete