Comment on the subsequent statement: “Since the U.S. imports more than it exports, it is essential for the U.S. to import capital from foreign countries to finance its current account deficits.”

Answer:  The statement assumes that the U.S. current account deficit causes its capital account surplus. Actually, the causality may be running in the reverse direction: U.S. capital account surplus may result the country’s current account deficit. Suppose foreigners find out the U.S. a great place to invest and send their capital to the U.S., resultant in U.S. capital account surplus. This type of capital inflow will strengthen the dollar, hurting the United States export and encouraging imports from foreign countries, resulting current account deficits.

Posted Date: 5/8/2013 6:05:44 AM | Location : United States

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