The document discusses the U.S. current account deficit and perspectives from various economists on its sustainability. It provides details on how the current account is calculated and its components. The deficit is seen as having both positive and negative impacts in the short and long run. Economists estimate the dollar would need to depreciate significantly, between 10-35%, for the deficit to be eliminated or reduced. The document also examines the largest trade deficit partner countries and steps the U.S. could take to control the situation.

1. THE U.S CURRENT ACCOUNT
DEFICIT
By: Tazeen Azeem , Muhammad Naveed, Sabaha Gul Khan,
Muhammad Saud, Farah Mazher ,Syed Anwar

2. It measures a country's
imports and exports of
goods, services
and capital.
It is in balance when the
people, businesses and
government have enough
income and savings to fund all
purchases occurring in that
country.
The Current Account:

3.  A current account deficit is when
a country import more goods,
services and capital than
they export.

4. Current Account Deficit
Positive sign of growth
Negative sign that the
country is at credit risk

5. The U.S Current Account
Deficit
1980 1985 1990 1995 2000 2005 2010

6. Why the richest
country on the
earth is facing
current account
deficit?

7. The U.S Current Account Deficit
The Bureau of Economic
Analysis divides the current
account into four
components:
Trade
Net income
Direct transfer
Asset income

8. •It occurs when a country's
imports more goods and
services than it exports.
Trade-deficit

9. Net Income-deficit
•The income paid out by a
country's individuals,
businesses and government to
their foreign counterparts is
more than they receive, it
contributes to a deficit.

10. irect Transfers-deficit
•Wages sent back to a foreigner's
home country.
•Direct investments made abroad
by a country's residents.
•Bank loans to foreigners.

11. Asset income-deficit
•Loans made by foreign banks abroad to
domestic banks.
•Sales of the stocks and bonds to foreigners.
•Foreign direct investment, such as
reinvested earnings, equities and debt.

12. How To Calculate
Current Account –
by Muhammad Naveed

13.  The Current Account is calculated adding up the
following four components,
1. Goods
2. Services
3. Income
4. Current transfers

14. Goods
Being movable and physical in nature, goods are
often traded by countries all over the world. When a
transaction of certain good's ownership from a local
country to a foreign country takes place, this is called an
"export." The other way around, when a good's owner
changes to a local inhabitant from a foreigner, is defined
to be an "import." In calculating current account, exports
are marked as credit (the inflow of money) and imports
as debit. (the outflow of money.)

15. Services
When an intangible service (e.g. tourism) is used by
a foreigner in a local land and the local resident
receives the money from a foreigner, this is also
counted as an export, thus a credit.

16. Income
A credit of income happens when an individual or a
company of domestic nationality receives money from
a company or individual with foreign identity. A foreign
company's investment upon a domestic company or a
local government is also considered as a credit.

17. Current Transfers:
Current transfers take place when a certain foreign
country simply provides currency to another country
with nothing received as a return. Typically, such
transfers are done in the form of donations, aids, or
official assistance.

18. A Formula for Calculating Current Accounts
CA = ( X – M ) + NY + NCT
CA is the Current Account.
X and M the Export and Import of Goods and Services respectively.
NY the Net Income from Abroad.
NCT the Net Current Transfers.

19. THE ECONOMIC IMPACT OF DECLINING
CURRENT ACCOUNT DEFICIT
In The Short-Run
A current account deficit is mostly advantageous.
Foreigners are willing to pump capital into a country to
drive economic growth beyond what it could manage on its
own.

20. THE ECONOMIC IMPACT OF DECLINING
CURRENT ACCOUNT DEFICIT
In The long Run
a current account deficit can sap economic vitality. Foreign
investors may begin to question whether economic growth
can provide an adequate return on their investment.

21. U.S. TRADE DEFICIT BY COUNTRY
BY SABAHA GUL KHAN

22. U.S. TRADE DEFICIT BY COUNTRY
TRADE DEFICIT
The U.S. has run a trade deficit since 1975. In 2012, the
deficit in goods and services was nearly $540 billion. This
means that U.S. exports of $2.194 trillion were less than its
imports of $2.73 trillion in goods and services

23. Bureau of Economic Statistics
International trade is measured by the Bureau of Economic
Statistics within the U.S. Census Bureau.
U.S. TRADE DEFICIT BY COUNTRY

24.
U.S. Trade Deficit in Goods
Then U.S. Trade Deficit in goods alone was $726.7
billion. That's because the U.S. exported $1.547 trillion in
goods, while importing $2.275 trillion. However, U.S.
exports have been strengthening compared to imports,
because the goods deficit was nowhere near the record
deficit of $828 billion set in 2006.
U.S. TRADE DEFICIT BY COUNTRY

25. World's Third Largest Exporter
1. EUROPEAN UNION ($ 2..17 trillion)
2. CHINA ($2.05 trillion)
3. GERMANY ($1.4 trillion)
U.S. TRADE DEFICIT BY COUNTRY

26. Three Different Criteria
 IMPORT
 Cheap consumer products
 Oil
 EXPORT
 Agricultural products,
 Industrial
 Supplies
 Capital goods
o IMPORT MORE THAN EXPORT
U.S. TRADE DEFICIT BY COUNTRY

27. COUNTRIES WITH THE LARGEST DEFICITS
AREN'T NECESSARILY THE LARGEST
PARTNERS:
 Canada - $616.6 billion traded with a $31.8 billion
deficit.
 China - $536.2 billion traded with a $315 billion deficit.
 Mexico - $494 billion with a $61.3 billion deficit.
 Japan - $216.4 billion traded with a $76.3 billion deficit.
 Germany - $157.3 billion traded with a $59.7 billion
deficit.

28. TRADE DEFICIT WITH DIFFERENT
COUNTRIES
 Trade Deficit With China.
 Trade Deficit With Japan.
 Trade Deficit With Germany.
 Trade Deficit With Canada.
 Trade Deficit With Mexico.
 Other Trade Deficits Were Mainly Caused by
America's Need for Oil.

29. Economist Review
by
Muhammad Saud

30. We are discussing five different point of
view the economist on sustainability issue.
The models used to estimate changes in
the dollar and CA are not empirically
derived; they are simulations based on
theoretical assumptions meant to be
consistent with reality.
Economist Review

31. Following are the economist those analysis we will
discuss,
• Economist Maurice Obstfeld and Kenneth Rogoff.
• Economist Olivier Blanchard, Francesco Giavazzi, Filipa Sa.
• Economist Sebastians Edwards.
• Economist Nouriel Roubini and Brad Setser.
• Economist Paul Krugman.
Economist Review

32. HAVE ESTIMATED HOW MUCH THE DOLLAR WOULD NEED TO
DEPRECIATE IN ORDER TO MAKE THE CA DEFICIT DISAPPEAR.
IN THEIR MODEL, SHOCKS TO AGGREGATE DEMAND OR
SHIFTS IN THE DEMAND OR SUPPLY OF TRADEABLE GOODS
COULD CAUSE THE CA DEFICIT TO DECLINE.
THEY ESTIMATE THAT THE REAL EXCHANGE RATE WOULD
DEPRECIATE BETWEEN 14.7% TO 33.6% IF A CA DEFICIT EQUAL
TO 5% OF GDP WERE ELIMINATED BY A CHANGE IN
AGGREGATE DEMAND, AND BETWEEN 9.8% AND 25.5%
IFELIMINATED BY A CHANGE IN THE SUPPLY OF TRADEABLE
GOODS. THEY ESTIMATE THAT DEPRECIATION WOULD BE
ACCOMPANIED BY A 3.9% TO 7.1% DECLINE IN THE TERMS OF
TRADE. THE PREDICTED DOLLAR DEPRECIATION IS SO LARGE
BECAUSE ABOUT THREE-QUARTERS OF U.S. OUTPUT IS NON-
TRADEABLE, PRODUCTION CANNOT BE QUICKLY SHIFTED
INTO TRADEABLE GOODS TO TAKE ADVANTAGE OF THE
DEPRECIATION, AND IMPORT.
Economist Review
1. Maurice Obstfeld and Kenneth Rogoff:

33. Explicitly allow asset demand to influence the exchange rate, and
they assume that assets from different countries are not perfect
substitutes. In their model, a CA deficit would eventually decline
because demand for U.S. assets is finite. Although an increase in the
demand for U.S. assets would initially cause the dollar to appreciate,
they argue, it would later depreciate to finance debt service (though it
would remain above its pre-appreciation value). They estimate that a
15% decline in the dollar would be associated with a decline in
the CA deficit equal to 1.4% of GDP.
2. Olivier Blanchard, Francesco Giavazzi, Filipa Sa
Economist Review

34. Edwards uses a similar model to simulate how much the dollar would
depreciate from its 2004 level depending on different assumptions about the
foreign demand for U.S. assets. Unlike Blanchard et al., he projects fairly
rapid declines in the CA deficit and dollar in the future. Under his optimistic
scenario, in which he assumes that the U.S. net debt will rise to 60% of GDP
by 2010 and then remain constant, the CA deficit would peak at 7.3% of
GDP in four years, before eventually declining to 3.2% of GDP (with most of
the decline occurring in the first four years after the peak).
If U.S does not control on the import and depreciated dollar to almost 28%
then U.S may face the rapid decline on the U.S CA deficits.
3. Sebastians Edwards:
Economist Review

35. Economists Roubini and Setser simulate what would happen to the
net foreign debt over the next 10 years under three scenarios. In the
first scenario,
Imports and exports continue to grow at historical rates. The CA
deficit would exceed by 12.8% from its current situation of GDP and
the net foreign debt would exceed 80% of GDP by 2012.
They estimate that the dollar would need to depreciate by about
10% from its 2004 level. All of these scenarios assume that relative
interest rates remain similar to past values as the net foreign debt
rises.
If foreigners demanded higher interest rates, then this would feed
through to a much larger CA deficit and debt path than simulated .
4. Nouriel Roubini and Brad Setser:
Economist Review

36. Economist Paul Krugman estimates that the dollar would need to
depreciate by at least 35% from its 2005 value in real terms in the
long run for the trade deficit to be reduced to zero . He looks for
evidence of whether this depreciation will happen gradually or
abruptly. For the depreciation to be smooth, Krugman argues that it
must be anticipated by rational investors, in which case they would
currently require a rate of return premium to hold U.S. assets (to
offset the loss suffered from the future dollar depreciation). To
determine how large the premium would have to be, he considers
two hypothetical paths for the dollar. In one path, the dollar declines
by 1.75% annually and net foreign debt peaks at 118% of GDP, or at
least one-third of the total U.S. capital stock.
5. Paul Krugman:
Economist Review

37. Impacts of Trade Deficits –
by Farah Mazhar

38. Effects
As usual in economics, there are several different
views of trade deficits. Depending on who you talk to,
they are
Bad,
Good,
Both (depending on the situation),
Immaterial.
Impacts of Trade Deficits

39. Bad Impact:
Borrowing from abroad
 Selling off their capital Assets
 Long Term Strategies
Future Production
 Labour Union
Impacts of Trade Deficits

40. Good Impact
Good for United State Economy
 Far from hurting employee
 boost the US Employment
Impacts of Trade Deficits

41. Both
If a trade deficit represents borrowing to finance current
consumption rather than long-term investment, or results
from inflationary pressure, or erode U.S. employment, then
it's bad.
If a trade deficit fosters borrowing to finance long-term
investment or reflects rising incomes, confidence, and
investment—and doesn't hurt employment—then it's good
Impacts of Trade Deficits

42. Immaterial
 Rising Consumption
 Consumer want imported food, clothes and cars
 Successful economy
Impacts of Trade Deficits

43. IMPACTS OF TRADE DEFICITS
Impacts of Trade Deficits
US DOLLAR
• Panama
• Ecuador
• El Salvador
• Guatemala
• Bahamas
• Cambodia and
• Haiti

44. Impact on GDP
Most mainstream economists believe that because the
current account deficit is offset by foreign investment in
the United States, the effect on GDP is negligible. The
security of the U.S. economy and the U.S. dollar make
investments in U.S. productive capacity and in U.S.
corporate and government securities quite attractive. So
as long as the trade deficits are financed by foreign
investment and the dollar is not overly weakened by them,
then GDP will be fine.
Impacts of Trade Deficits

45. WHAT STEPS SHOULD BE TAKEN
BY U.S IN ORDER TO CONTROL THE
CURRENT SITUATION –
BY SYED ANWAR

46. THE FOLLOWING STEPS SHOULD BE
TAKEN IN ORDER TO CONTROL THE
SITUATION
 U.S have to focus on their net Exports.
 Reduce the volume of high Imports.
 Nationals have to save money in their local banks, in order to
give boost to the economy.
 U.S have to create demand for their Assets (such as U.S.
Treasury securities). all around the globe.
 U.S must reduce their large expenses which they are
spending on the War.

47. U.S HAVE TO FOCUS ON THEIR NET
EXPORTS
 It is witnessed that in the past few years U.S has
failed to create demand for their local product in the
international market. Now, if they build some
effective strategies in order to create the demand of
the local product their net export will be increased
in the near future.

48. REDUCE THE VOLUME OF HIGH
IMPORTS
 It is known that U.S locals are extravagant and hence
the whole nation is considered as the spendthrift. In past
few years U.S started to import foreign products heavily
from different countries. By this very reason they are
facing trade imbalances.

49. NATIONALS HAVE TO SAVE MONEY IN
THEIR LOCAL BANKS, IN ORDER TO GIVE
BOOST TO THE ECONOMY
 U.S are very much depending on the foreign investment
and the locals are not saving the money in the National
banks. Therefore U.S have to create awareness in the
country to keep the money the money in the banks in
order to give boost to the economy.

50. U.S HAVE TO CREATE DEMAND FOR
THEIR ASSETS ALL AROUND THE
GLOBE.
 A number of analysts are concerned that the Asian
central banks would reduce their demand of U.S Assets.
Unleashing an abrupt collapse in the value of Dollar. U.S
should come up with some positive plans to over come
on this challenge.

51. U.S MUST REDUCE THEIR LARGE
EXPENSES WHICH THEY ARE
SPENDING ON THE WAR
 At the moment U.S is spending a huge amount on the
war which is being fought in the different countries. If U.S
wants to reduce this C.A deficit then they must have to
cut down the huge expenses which they are incurring in
the Wars.

52. CONCLUDING
REMARKS
 Never in the history of modern economics has a large
industrial country run current Account Deficit of the
magnitude posted by the U.S since 2000. These
development can be explained in the context of a
portfolio model of the CA, where for a number of
reasons- the end of the Cold War, foreign investor
increase their net demand for U.S Assets.