US & the pertaining issue of Current Account Deficit:

As mentioned in the given case,

A country with good investment prospects, a large budget deficit, or a low propensity to save
tends to have a net capital inflow and a current account deficit. In other words, policies that
promote investment spending, discourage private saving, or lead to a large budget deficit result
in a current account deficit.
The onus is on:
a) Encouraging consumer spending by giving tax cuts and low interest rates.
b) Providing good investment prospects to foreign customers as most of the big-shot
investors find American securities less risky as compared to EU or other emerging
markets.
c) Consistent decline in competitiveness as the country is vastly dependent on importing
goods rather than developing providing a boom to economies like India and China.
Ever since early 90s, the US has always imported more than they export. As a result of
such a dependency on exports, their production levels have dropped continuously which
on the other hand has led to a need for cheaper imports from other countries to sustain
an average American household. Since cheap labor is available in foreign countries most
of the work is outsourced and hence their production is not up to their full potential.
Also, the tax revenue system gives major impetus to consumer spending rather than
saving which eventually led to government debt rising continuously year after year i.e.
the requisite for high current account deficit is Low savings ratio/ high consumer
spending. People in US consume more and save less. Since US is consumption driven
country, cheap credit is available and they have the attitude that borrowing is okay.
These things encourage people to buy more which force to have more imports.
Therefore, with years, borrowing has become a part of US citizen psychology.
From the governments side, the focus is more on external oriented demand-meeting; it
is not bringing enough supply side policies to improve the productivity and the
efficiency of the manufacturing industries. Thus manufacturing of daily-use products are
in terrible state which is advantageous to a state like China with its cheap labor that
produces more and US imports more from China.

 One more important factor is that all the transactions that take place through US happen
in terms of dollar which gives US a high advantage situation. Foreigners are willing to
buy dollar assets at a lower premium. Because of this US is able to attract more capital.
This situation will be taken care by depreciating dollar.

We can see that current account deficit is high in US reaching its peak in 2012. Though
there has been substantial recovery in 2013, its still a very high amount. Current
account deficits can be reduced by increasing exports by encouraging industries by
subsidies, custom duty exemptions or by decreasing imports by placing some import
restrictions, quotas etc.

 This graph mainly shows the gap between CAD and the GDP of the nation. The trend
shows that this gap was decreasing from 2006 onwards that can be attributed to money
value of dollar increase. However, it is again increasing slightly towards 2010-11.

The Balance of payments report of USA has been continuously negative meaning they