Global Economics What Has Caused Research Proposal

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In a slumping economy, imports decrease, but exports may hold steady. Another way in which the business cycle is related to the current account is that measure taken to address business cycle issues, such as trade barriers, subsidies or exchange rate policy can impact the current account by altering the balance of trade. However, it would take a substantial change in the business cycle in order to affect the current account at this point. The country would need to reduce imports dramatically, as happened in Argentina following their currency collapse. Regular business cycle shifts will impact the current account but the deficit is presently so large that it these impacts will not reverse the current trends unless the change in the business cycle is catastrophic.

What is the relationship between a country's net financial inflows & its current account?

The relationship between the net financial flow and the current account deficit goes both ways. Changes in either one will result in changes to the other.

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The two represent a zero sum game. Financial inflows should directly match current account outflows. In theory the market responds to any disequilibrium between the two, causing adjustments in interest or exchanges rates that bring the financial inflows and current account deficit back into equilibrium.

How does the U.S. make adjustments for the balance of payments issues?

The U.S. has several tools that it uses to adjust balance of payment issues. Some countries use capital controls, but the U.S. seldom does this. They are more likely to alter the interest rate, or use their reserves to affect their exchange rate. This affects the value of the inflows and deficit.

They can also work at the microeconomic level by erecting trade barriers to stem specific flows. This is seldom used as macroeconomic policy but is a government policy that impacts the balance of payments.

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