Mann (2002) outlined three approaches to explaining the account deficit in the USA. The first was the domestic perspective based on the country’s income and the product accounts. Mann (2002) opined that this point of view showed patterns of domestic savings as well as investments and how they reflect in trade and immediate account balances. A trade deficit would occur if the national spending went beyond the domestic production an indication that the country would be "spending beyond its means.”
The second perspective was on international trade. Under this approach, Mann (2002) described the current accounts based on the factors affecting the flow of exports and imports. Exports tend to grow faster as the foreign income grows faster with the relative price of exports to the competing products at the destination market falling. As international economies expand, their demand for services would push them to purchase services from the USA especially after the service industry achieves a greater liberalization via multilateral trade negotiations.
The third perspective of the current deficit involved the international capital markets. Mann (2002) considered the effects of differential rates of return to the flow of finance and the exchange value of the American currency. International financial transactions are enormous and increasing quickly due to financial and technological innovations. The current account deficit occurs in the form of private equity and bonds, and direct investment in the country.
Mann (2002) opined that the current account deficit was not sustainable. He argued that the current negative net global investment would increase, and the exposure in the portfolio of the global investments will likely rise. With a very high investors’ portfolio, diversification of tastes would be challenging making sustainability a problem.
Reference
Mann, C. L., (2002). Perspectives on the U.S. Current Account Deficit and Sustainability. Journal of Economic Perspectives. Volume 16, Number 3, summer 2002, pages 131-152.
