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Section S1_Group 6_US CAD

Section S1_Group 6_US CAD

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Published by Puneet Rastogi

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Published by: Puneet Rastogi on Aug 29, 2012
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Is a situation that occurs when country’s total of goods, services and transfers is greater than the country’s total

export of goods, services and transfers.

2) Surge in Household wealth driven by the stock market The ratio of net worth to net disposable income rose to 32. the country imports more goods and services. To cover this excess spending. US economy expanded more rapidly than other economies of US trading partners .8% during the period of 1990 – 2000’s 3) Post 1998.Factors contributing to CAD 1) Accelerating US Productivity Faster Productivity growth leads to domestic investment spending.

What is Unsustainable  A sharp hike in Interest rates  A rapid Depreciation of dollar  Or other domestic economic disruption  Sustainability refers to a stable state in which a current account deficit generates no economic forces of its own to change its trajectory. .

US Economic Performance  Current Account Deficit  Trade Account  Income Account  Transfer Account  Net International Investment Position  Foreign Owned US assets – US owned foreign assets .


almost 7% of GDP. there was huge trade deficit and unilateral transfer payments which lead to high CAD. securities Between 1995 – 2002. Post 2006. dollar appreciated almost 30% leading to high CAD. FDI net flows is –ve unlike pre 2002 when it is taking care of deficit financing During 2003-2004. Post 2006. CAD is completely financed through net fixed income flows and foreign purchases of govt. . US aggregate demand provoked dollar decline. leading to trade deficit gaining stable value of around 3%.1) 2) 3) 4) 5) Graph shows that Current Account Deficit has become increasingly large since 1992 Since 2002.



 As seen from the US net investment position. so demand for dollars and dollar denominated assets will remain strong. the net figure is sustainable in long term . Foreign owned US assets and US owned assets abroad are almost going hand in hand.Is the US Deficit Sustainable  The dollar is used in 90% of interbank transactions  Exchange rate fluctuations has minimum impact on US  Dollar is an international reserve currency.

Contd  Owing to Euro crisis and emerging economies not being stable. The worlds top 8 investor countries has spent a lot in US.  FDI has still a great potential and a deepening effect on US economy. . US is still the preferred choice for foreign investors . which shows the confidence of top investors. So net capital inflows are likely to remain healthy.

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