Evaluating Causes, Cures and Global Imbalances
INTRODUCTION This chapter, like the previous one, is concerned with the causes of the US deﬁcit. In Chapter 1 we outlined our way of classifying the causes of the deﬁcit in terms of four approaches (trade, absorption, savings and investment, and portfolio balance) and two perspectives for each (domestic and international). Chapter 2 looked at the trade approach. When viewing the current account deﬁcit in these terms we found there to be certain anomalies – in particular, elasticities pessimism and the Houthakker–Magee income elasticity asymmetry – that suggest diﬃculties in trying to account for the deﬁcit from the viewpoint of trade ﬂows alone. One reason is inherent in the analysis itself. Consider the condition that a deﬁcit ‘improving’ devaluation depends on the size of the sum of the price-elasticities of demand for exports and imports. This is an example of Marshallian partial equilibrium analysis, which requires that the market be small. Smallness in this context means that the repercussions of it on the rest of the economic system can be ignored. However, even in the relatively ‘closed’ United States, the market for all exports and imports is not a tiny part of the economy and the income and other eﬀects on the rest of the system cannot be neglected. For such reasons, in this chapter we broaden the analysis beyond trade ﬂows by linking up the basic accounting identities of the balance of payments statistics with the national income and production accounts in order...
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