Evaluating Causes, Cures and Global Imbalances
TWO APPROACHES This chapter and the next examine the causes of the US current account deﬁcit (or, if preferred, the US capital account surplus). There is no shortage of hypotheses put forward to account for this phenomenon which, from the perspective of the United States at $811 billion in 2006, is at an historically unprecedented high and, from the viewpoint of the international economy, absorbs perhaps as much as four-ﬁfths of cross-border world savings ﬂows. Our analysis seeks to untangle the various explanations that have been oﬀered and analyse them in a systematic manner. As noted in the previous chapter, there are two broad ways to approach a country’s current account position. One is in terms of the imports and exports of goods and services (along with other current transfers and income ﬂows) and the associated ﬁnancing implications in terms of capital ﬂows. The other starts with the national income and production accounts to show how an imbalance between total domestic demand for goods and services and domestic production or, equivalently, between domestic investment and domestic savings, gives rise to net imports or net exports of goods and services to ﬁll the gap. The ﬁrst tends to look more narrowly, although not exclusively, upon trade ﬂows and the ﬁnancial aspects of capital inﬂows and outﬂows, whereas the second introduces a wider range of factors both within and across countries. The trade ﬂow perspective is the topic of this chapter. Chapter 3 considers the national income...
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