Current Account Deficit in the US Economy *

            

Details


Case Code : CLIBE056
Publication date : 2005
Subject : Business Environment
Length : 04 Pages

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Abstract: ICMR India ICMR India ICMR India ICMR India RSS Feed

The caselet explains the reasons for current account deficit (CAD) in the US economy. It also explains the effect of US CAD on different economies of the world. The caselet also discusses the measures that need to be taken by an economy to maintain international trade balance.

Issues:

Possible reasons for the US current account deficit.
Increasing current account deposit of US and its impact on Asian banks.
Investment flow from Europe for US treasury bonds..

Introduction

Current Account Deficit (CAD) is not new to any country. Usually, any country may experience CAD at any point of time and the US is no exception. The US had been having current account deficit since the 1970s.

However, in recent years, the deficit has risen to alarming heights. Since 2001, it has increased tremendously and reached a record high of US$ 665.9 billion, i.e. 5.7 percent of its GDP by the end of 2004.

There are several reasons for the increase in CAD. One is the stiff competition from European and Japanese firms which were passing on their excess capacities to the US market....

Questions for Discussion:

1. The US had been facing a current account deficit (CAD) since the beginning of the 1970s and the deficit has increased tremendously since 2000. Briefly discuss the reasons for the CAD in US and the significant increase in CAD after 2000.
2. Asian central banks have invested huge amounts in US Treasury bonds and these banks face numerous problems because of these investments. Briefly discuss the problems faced by the central banks that had financed the huge US CAD. Suggest some measures that they could take to avoid or reduce their risk.

Key words:
Current Account Deficit (CAD), Gross Domestic Product (GDP), Foreign Direct Investment (FDI), globalization, outsourcing, trade deficit, Net International Investment Position (NIIP), Federal Reserve, Inflation, United Nations, European Central Bank (ECB).





* This caselet is intended for use only in class discussions.
** More comprehensive case studies are priced at Rs.200 to Rs.700 (US $5 to US $16) per copy.