The Relationship between U.S. Current Account Deficit and Performance of the Economy in a Globalized Context

Abstract

In international trade and commerce, global imbalance has been a normal occurrence. It is normal in the sense that some countries run trade surpluses while other countries deficits. In the 21st century, global imbalance has added a new dimension. It has become almost a solo show for the U.S. versus the rest of the world. The U.S. current account deficits now registers a magnitude up to trillions of dollars, far eclipsing the amount of all other deficit countries combined. Equally noticeable, there has been steady and huge capital inflows into the U.S. from the so-called “Savings-and-Glut” nations in the past decade. They are mostly from the emerging markets and oil-exporting countries. Global imbalance has become extreme in the era of globalization. This research is largely an exploration of the relationship among the various factors in the U.S. external sector, including the trade account, international financial flows, and the exchange rate by using their proxy variables in respective segments. This research will further deepen the understanding of the relationship among all these variables and the U.S. current account deficit.