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February 25th 2005

US current account deficit tied to growth

Today, the United States upwardly revised forecasts for the growh of its economy. What was surprising was the announcement that the US current account deficit also expanded. Coincidentally, a new report claims the US current account is closely correlated to economic growth, which is quite counter-intuitive. Apparently, as the economy grows, increases in disposable income leads consumers to import more goods for personal use. In addition, high expectations for future growth leads businesses to invest more, often in the form of imported capital and machinery. The study used historical growth rates and changes in the current account balance to demonstrate the relationship. It pointed to Germany as an example, where a record trade surplus is coinciding with record unemployment and economic stagnation.  In short, reports the Financial Times:

America’s trade deficit is essentially an accounting abstraction. Our attention should focus on what really matters – economic growth, job creation, industrial output, and the free and open markets that promote real growth.

Read More: Forget Trade Deficits: Go for Growth

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Posted by Adam Kritzer | in US Dollar | No Comments »

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