Question

Suppose that the United States’ principal trading partners experience a sharp recession with falling GDP. How will the U.S. economy be affected? Can the United States insulate itself from this effect?

Answer 1

When a trading partner of the USA faces falling GDP, the US export to that country will fall as the income of the trading partner is falling. Therefore, US exporter will see falling income and the current account deficit in the USA will widen.

The United States can insulate from the effects only if the domestic consumption increases large enough to compensate for the falling exports. However, this is not easy to increase domestic consumption by such a huge margin.