Global Economics Essay Example | Topics and Well Written Essays - 750 words - 2

Global Economics - Essay Example Such was the case that by the end of 2002, a trend of account deficit has been established with statistics citing that foreign direct investment leads the US investment abroad by $2,387 billion. (Bureau of Economic Analysis) The lead has the tradition of roughly doubling year after year. â€Å"Attracted by the prospect of higher yields, foreigners channel their savings into the United States and fill the growing wedge between domestic investment and savings. In the process, aggregate demand also expands, causing the current account deficit to widen.† (Humpage 2004) We cite a specific example: During 1990s, â€Å"three interrelated factors are primarily responsible for most of the decline in the current-account balance since 1991. One was the relatively rapid growth of income in the United States compared with that in other major industrialized countries over most of the period. Another important factor was a surge in foreign demand for dollar assets in the late 1990s, which contributed to a higher dollar exchange rate and lower U.S. interest rates. Finally, a drop in the national saving rate owing to a rising federal deficit has helped push the current-account balance lower since 2001.† (CBO, 2004) The current account deficit poses a problem in several ways. One of the biggest consequences here is the idea that foreign investors and savers have established a significant financial claim on the United States and its domestic resources. (Allen, p. 145) In equal gravity, â€Å"the United States has slipped – suddenly and dramatically – from being the world’s largest creditor country to being the world’s largest debtor.† (Bryant and Holtham, p. 57) On a more specific note, Bryant and Holtham illustrated that with regards to merchandise trade deficit, there is a threat of recession when there is an excess of imports over exports as it significantly drags down the economy. By the end of 2006 it is projected that