[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

7
6
5
Federal
deficit
PERCENTAGE OF GDP
4
3
2
1
0
Trade
deficit
–1
–2
–3
1960 1965 1970 1975 1980 1985 1990 1995 2000
Figure 26.2
THE U.S. FISCAL DEFICIT AND
TRADE DEFICIT
Increases in government deficits in the 1980s were accompanied by increases in foreign
borrowing. During the late 1990s, the fiscal deficit fell but investment boomed.
Beginning in 2001, the government’s deficit again increased—and with it, the trade
deficit.
SOURCE: Economic Report of the President (2004).
country exported more than it imported. Europe and Japan did not receive
enough dollars from selling exports to the United States to buy the imports they
desired, and they borrowed the difference from American households and firms.
There was a net capital outflow from the United States that gradually accumulated.
Japan now exports more than it imports, with the difference equal to its
capital outflow.
The basic trade identity implies that if U.S. public saving and investment are
unchanged and private saving falls, then the U.S. interest rate will rise to attract
additional capital inflows, and foreigners will end up holding more American assets.
But the identity does not specify which assets they will hold. They may buy government
bonds or they may buy stocks or bonds of U.S. companies. In 2003, for
instance, foreign investors purchased almost 60 percent of the new debt issued by
the U.S. Treasury.
Case in Point
THE TRADE DEFICIT
At the same time that the fiscal budget deficit in the United States was exploding in
the 1980s, so too was the trade deficit. From about $20 million a year from 1977 to
574 ∂ CHAPTER 26 THE OPEN ECONOMY AT FULL EMPLOYMENT