South-Western College Publishing - Economics  
Current Account Deficit and Dollar Decline Worry World Leaders
Subject U.S. Current Account, Declining Dollar
Topic International Trade
Key Words

Current Account, World Trade, Appreciation, and Depreciation

News Story

The current account is an accounting record of the country's exports and imports of goods and services, its net investment income, and its net transfers. The current account of the U.S. for the last quarter of 2003 reached $135 billion, the third largest in history. This figure represented 4.9 percent of GDP. The first quarter of 2004 posted a ratio of the current account to GDP of 5.2 percent, a record high.

Some analysts worry about the effect of financing the current account deficit on the still recovering economy. The deficit may be financed by selling off assets and by borrowing, that is, by going into debt. Alan Greenspan, Chairman of the Federal Reserve, is not worried by the deficit. "There is, for the moment, little evidence of stress in funding U.S. current account deficits," Greenspan said in a speech in Berlin. Greenspan said the widening to record levels of the ratio of current account deficit to GDP had been, "with the exception of the dollar's exchange rate seemingly uneventful." However, the 25 percent decline in the dollar against major currencies since early 2002 is what worries European leaders.

European Central Bank president Jean-Claude Trichet, countered, saying that he was concerned about "brutal" currency swings. The decline in the dollar makes US goods relatively less expensive and tends to reduce European exports. Ernst Welteke, a central bank member, said that the euro's appreciation could "put a brake" on a recovery in Germany.

Greenspan admits that euro-area exporters "have been under considerable pressure," but said the cost of borrowing has fallen worldwide helping Euro-area economies. Mr. Greenspan responds by saying he was "quite optimistic" there would not be a dollar crisis because of the flexibility shown in individual economies in recent times.


(Updated March, 2004)

Questions
1.

What is meant by net transfers in the current account?

2. Explain why Welteke is concerned about the appreciation in the euro.
3. How does the falling cost of borrowing, mentioned by Greenspan, help European exporters?
Source Bloomberg News, "Fed Chief Offers an Optimistic View", The New York Times Online, January 14, 2004.

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