Title: Is a Brighter Future Waiting for the U.S. Current Account Balance
Abstract: ABSTRACTThis article uses cross sectional and times series data to forecast the U.S. current account balance and projects that the U.S. will have a surplus in that account in less than 10 years. This improvement will happen with the help of the energy sector; however, trade, service and income accounts will be also contributing. Both cross sectional and time series projections display a rather robust outlook for the U.S. current account balance. These predictions shatter many glooms and doom scenarios about the overreliance of America on Chinese capital to finance its deficit. By 2020, the U.S. could be in a position to actually finance the deficit of other countries.JEL: F, F13KEY WORDS: Current Account Balance, U.S. Trade Deficit, Balance of Payments, Cross Sectional Analysis of Trade DataINTRODUCTIONThe current account deficit is an important economic variable showing the level of competitiveness of a nation. Usually surpluses in a current account are associated with more employment and creation of higher paying jobs. So, it is desirable to have a surplus in this account rather than a deficit. According to the Federal Reserve Bank of New York (2009), the current accounts are divided into the following four sub-accounts.Merchandise trade consists of all raw materials and manufactured exported, minus those that are imported. The difference is a Balance on Merchandise Trade. Services include tourism, transportation, entertainment, engineering and business services, such as law, management consulting and accounting. Fees from overseas amusement parks, such as Euro Disney, patents and copyrights on new technology, software, books, music and movies also are recorded in the service category. The difference between those receipts and payments makes the Balance on Service.Income receipts include income derived from ownership of assets which are held abroad, such as dividends on holdings of stock and interest on securities. Again, the differences between what we received from foreigners and what we pay them in these categories is called Balance on Income. Unilateral transfers represent one-way transfers of assets, such as worker remittances from abroad and direct foreign aid. In the case of aid or gifts, a debit is assigned to the capital account of the donor nation. Because of the double entry nature of the BOP accounting, if the U.S. provided gifts or humanitarian assistance, the entry is negative in this sub-account, and it values are entered as a positive number in Merchandise trade as export.The U.S. current account deficit has been a subject of hot debates between researchers who believed the recent trend in the expanding the deficit will continues and those who believe the deficit gap is narrowing. As Table 1 shows, in 2009 the United States had a deficit in goods of $517 billion but a surplus in services of $138 billion, and Income of $ 70 billion. Adding Unilateral Transfers to these sums will result in a negative balance of $392 billion. Therefore, in 2009, the U.S. had a deficit in its Current Account balance. U.S. has never had a surplus in its Current Account in the past 40 years.Since 2009, U.S. economy has substantially improved. Its current account has also improved and its capital account indicates a growing appetite by foreigners to invest in the United States. However, if the 2009 trend would have continued for a few more years, our worst fears and anxiety would have become a nightmarish reality. The following figure projects the U.S. current account balance if the 2009 crisis would have continued.In the next section we review the literature in this subject, present data set and examine the inflection point on the U.S. current account balance. This inflection point is at the core of this article as it has been missed by previous researchers. By incorporating the inflection point in the data analysis, a robust picture of the U.S. current account balance will be revealed. …
Publication Year: 2014
Publication Date: 2014-09-01
Language: en
Type: article
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