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Finance Master - Essay Example

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How is the significance of a country's economy assessed to draw such conclusions
To evaluate a country's economy, economists usually use the measure known as the current account. The current account is "the combined balances on trade in goods and services, income, and net unilateral current transfers" (Weinberg 2006). The worsening current account deficit must cause permanent depreciation of a national currency. To economists' surprise, in case of the US, the growing current account deficit produces periods of appreciation of the US currency. Such were the periods from 1995 to 2002 and 2005 (Roubini 2005).
Roubini claims that the current account deficits may be related to the appreciation or depreciation of a currency (2005). A national currency weakens when the inflow of capital in the country cannot fully finance a current account deficit, that is, the supply of financing from the capital account is low (Roubini 2005). As it is seen, capital inflows and outflows play an important role in this relation. Short-term and long-term interest rates, political risk factors, the GDP growth rate and other economic factors determine the capital flows and are the direct causes to the currency fluctuations. Roubini calls all these "the law of gravity" for a currency (2005).
Still, as it was mentioned above, sometimes the laws of gravity are defied (Roubini 2005). The current account deficit worsens so much that the trajectory of its falling recoils reversely on the national currency. In 2005, the US dollar appreciated despite all dooming predictions. Which were the factors responsible for such a turn According to Roubini's opinion, there are three major factors that made it possible for the US dollar to maintain its status quo:
1/ The US short-term interest rates were kept tightened as compared to Europe and Japan, where they were on hold;
2/ The economic growth rate in the US was higher than in the European Union and Japan;
3/ The US Government adopted the Homeland Investment Act as of October, 2004, which was meant to allow companies to repatriate offshore cash balances at a reduced tax rate (Roubini 2005).

In 2006 the US current account deficit sloped down even more dramatically than during the previous year. According to the latest data, it increased to $218.4 billion in the second quarter of 2006 (Weinberg 2006). Economists do not cease to debate about the real and hypothetical explanations as to the causes worsening the overall picture of the US economy, in general, and the current account deficit, in particular. To generalize different standpoints, all debating boils down to two groups of explanations: domestic and exterior causes.
Domestic developments focus mainly on diminished saving rates due to profligate consumption. (Ferguson 2005). Economists have made considerable research trying to explain the decline in personal saving over the past two decades in the USA. Unfortunately, there is no theory, which can fully account for it. Still, several factors may serve as important premises for it: 1/ Large capital gains on investments in land and stocks make people richer, thus, giving incentive to excessive consumption. As a result, U.S. consumers purchase more goods, including imports; 2/ A larger number of credit opportunities (credit cards, home loans (Arnold 2000). 3/ The increasing budget deficit. G. Bush Jr.' s replays R. Reagan economic policies: large ...Show more
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During the last two decades, the US trade deficit has grown very dramatically, giving concern that it may be detrimental to the national and global economies. The US trade deficit is determined merely by the balances between saving and investment in the country and in other outside countries…
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