The U.S. trade deficit, current account deficit and investment

a. Define national saving as private saving plus the government surplus-i.e., as S + T - G. Now, using equation (19.5), describe the relation among the current account deficit, net investment income, and the difference between national saving and domestic investment.

b. Go to the statistical tables of the most recent Economic Report of the President (www.gpoaccess.gov/eop/). In Table B-1, "Gross Domestic Product," retrieve annual data for GDP, gross domestic investment, and net exports from 1980 to the most recent year available. Divide gross domestic investment and net exports by GDP for each year to express their values as a percentage of GDP.

c. The trade surplus in 1980 was roughly zero. Subtract the value of net exports (as a percentage of GDP) in 1981 from the value of net exports (as a percentage of GDP) in the most recent year available. Do the same for gross domestic investment. Has the decline in net exports been matched by an equivalent increase in investment? What do your calculations imply about the change in national saving between 1981 and the present?

d. When the United States began experiencing trade deficits during the 1980s, some officials in the Reagan administration argued that the trade deficits reflected attractive investment opportunities in the United States. Consider three time periods: 1981 to 1990, 1990 to 2000, and 2000 to the present. Apply the analysis of part (c) to each of these time periods (i.e., calculate the change in net exports and gross domestic investment as a percentage of GDP). How does the change in net exports from the 1980 values compare to the change in investment during each period? How did national saving change during each period?

e. Is a trade deficit more worrisome when not accompanied by a corresponding increase in investment? Explain your answer.

f. The question above focuses on the trade deficit rather than the current account deficit. How does net investment income (NI) relate to the difference between the trade deficit and the current account deficit in the United States? Find Table B-103 "U.S. International Transactions" from the Economic Report of the President. Use your work in part (b) to calculate NI as a percent of GDP. Is this value rising or falling over time? What is the implication of such changes?