Question

The United States Trade Balance has recently been in deficit, explain the economic reasoning behind this deficit trend and how do expect this to affect the U.S. Capital Flow, in your explanation, be sure to explain if the U.S. is a Net Lender or Net Borrower from the rest of the world.

Answer 1

Answer - The meaning of deficit is the excess of spending over the revenue. The spending will comprise the borrowings from the rest of the world because of insufficient revenue. Hence US will be the Net borrower from rest of the world.

Initially this borrowing leads to the rise in government spending and boosts the growth of the economy by increasing GDP. But in the long term , it is the burden on the economy. The debts are to be repaid along with interest. To cover up this increased cost of borrowing , the interest rates in the economy rise and there is the capital outflow from the economy in the long term. Hence the deficits are good in short run but in long term they harm the economy leading to greater outflows.