Principles of Economics- Mankiw (5th) 644

Principles of Economics- Mankiw (5th) 644 - 666 PA R T E L...

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666 PART ELEVEN THE MACROECONOMICS OF OPEN ECONOMIES CASE STUDY ARE U.S. TRADE DEFICITS A NATIONAL PROBLEM? You may have heard the press call the United States “the world’s largest debtor.” The nation earned that description by borrowing heavily in world fi- nancial markets during the 1980s and 1990s to finance large trade deficits. Why did the United States do this, and should this event give Americans reason to worry? To answer these questions, let’s see what these macroeconomic accounting identities tell us about the U.S. economy. Panel (a) of Figure 29-2 shows national saving and domestic investment as a percentage of GDP since 1960. Panel (b) shows net foreign investment as a percentage of GDP. Notice that, as the identi- ties require, net foreign investment always equals national saving minus do- mestic investment. The figure shows a dramatic change beginning in the early 1980s. Before 1980, national saving and domestic investment were very close, and so net for- eign investment was small. Yet after 1980, national saving fell dramatically, in
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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