	Introduction

International trade continues to grow in importance for the world economy as well as for the U.S. economy, enhancing economic well-being generally, but also imposing costs on trade sensitive sectors of national economies. The Current Account Balance

The current account balance is the nation's most comprehensive measure of international transactions. It has three component balances: the goods and services balance, the investment income balance, and net unilateral transfers. The three types of transactions measured in the current account balance are thought by economists to be closely related to current production, consumption, and income. For the United States, the size of the current account deficit is largely the refection of a similarly sized goods and services deficit (i.e., trade deficit). In 2009, the United States had a current account deficit of $378.4 billion, composed of a goods and services deficit of $374.9 billion, an investment income surplus of $121.4 billion, and a net unilateral transfers deficit of $124.9 billion. The U.S. current account (trade) deficit, decreased to just above $378 billion in 2009, down substantially from $706 billion in 2008, and from a high of $803 billion in 2006. As a percentage of GDP, the 2009 trade deficit stands at 2.7%, down from 4.9% in 2008, and a record high of 6.1% in 2006. With economic recovery, more enduring economic forces are likely to determine the size of the trade deficit. Rather, trade imbalances occur because of underlying macroeconomic spending and saving behavior at home and abroad. Since the early 1980s, there is a strong tendency in the United States to spend beyond current output, with the excess of demand met by a net inflow of foreign goods and services that manifests itself as the U.S. current account deficit. Namely, that total domestic output, known as gross domestic product (GDP) equals the sum of consumption (C), government spending (G), investment spending (I), and exports (X) minus imports (M) or:
GDP = C+ I + G + (X-M)
This identity can be rewritten as:
(X-M) = (GDP – C - G) – I
Because exports minus imports (X-M) is equivalent to the current account balance (CA) and because GDP minus spending by consumers (C) and government (G) equals saving (S), the expression can be simplified to the internal balance identity:
CA = (S – I)
That is to say, a current account imbalance is always exactly matched by an imbalance between domestic saving and investment. With a net inflow of capital, the dollar's exchange value rises; the higher exchange rate causes the international price of U.S. exports to increase, dampening foreign sales; and causes the dollar price of imports to decrease, stimulating purchases of foreign goods. The added output would most likely be large enough to make debt-service payments to foreigners and boost the domestic living standard. The saving-investment imbalance that the U.S. economy has experienced for the last decade is not the result of domestic investment rising relative to the domestic saving rate as occurred in the 1990s; rather, it is the result of the domestic saving rate falling relative to the domestic investment rate. If the saving rate is raised, the trade deficit will decrease accordingly. A disorderly adjustment is possible, but not probable. Do Trade Deficits Cause Unemployment? (A more substantial improvement in the trade deficit in manufactures occurred in 2008. So long as domestic saving in the United States falls short of domestic investment and so long as an inflow of foreign saving is available to fill all or part of the gap, the United States will run a trade deficit. Macroeconomic Policy Responses: Domestic and Foreign

To efficiently reduce or eliminate the U.S. trade deficit most economists would argue that there needs to be a rebalancing of global spending: the United States would need to reduce domestic spending, and the economies with trade surpluses would need to increase domestic spending. The trade deficit could fall on its own without U.S. policy actions. On the other hand, if the relative rate of return from investment in U.S. assets grows more attractive, the net capital inflow could expand and bring the trade deficit up with it.
The current account balance is the nation's most comprehensive measure of international transactions. It has three component balances: the goods and services balance, the investment income balance, and net unilateral transfers. These are all transactions thought to be closely related to current production, consumption, and income. For the United States, the size of the current account deficit is largely the refection of a similarly sized goods and services deficit (i.e., trade deficit).
The U.S. current account (trade) deficit grew steadily from 1992 through 2006. In 2007, however, the trade imbalance decreased to $726.6 billion from $803.5 billion in 2006. In 2008 and 2009, the trade deficit continued to decrease, reaching $706.1 billion and $419.9 billion, respectively. These decreases reflected strong export sales and a steady weakening of import purchases. A sizable depreciation of the dollar from 2002 through 2007 made U.S. exports more attractive to foreign buyers and imports less attractive to American buyers. In addition, since 2006, economic growth in the United States slowed relative to that of its major trading partners. As a percentage of GDP, the trade deficit in 2009 decreased to 2.9%, down from a record 6.1% in 2006.
The size of the U.S. trade deficit is ultimately rooted in macroeconomic conditions at home and abroad. U.S. saving falls short of what is sought to finance U.S. investment. Many foreign economies are in the opposite circumstances, with domestic saving exceeding domestic opportunities for investment. This difference of wants will tend to be reconciled by international capital flows. The shortfall in domestic saving relative to investment tends to draw an inflow of relatively abundant foreign savings (capital), seeking to maximize returns and, in turn, the saving inflow makes a higher level of investment possible. For the United States, a net capital (savings) inflow also leads to a like-sized net inflow of foreign goods—a trade deficit. In 2007 and 2008, both saving and investment fell, but in a weakening economy investment fell more, causing the trade deficit to narrow.
The benefit of the trade deficit is that it allows the United States to spend now beyond current income. Since the 1980s, that added spending was largely for investment in real estate, durable goods, and capital equipment. In recent years, the added spending was for consumption. The cost of the trade deficit is a deterioration of the U.S. investment-income balance, as the payment on what the United States has borrowed from foreigners grows with rising indebtedness. Borrowing from abroad allows the United States to live better today, but the payback may cause some decrement to the rate of advance of U.S. living standards in the future. U.S. trade deficits do not now substantially raise the risk of economic instability, but trade deficits can impose adjustment burdens on some trade-sensitive sectors of the economy.
Policy action to reduce the overall trade deficit is problematic. Standard trade policy tools (e.g., tariffs, quotas, and subsidies) do not work. Macroeconomic policy tools can work, but recent and prospective government budget deficits will reduce domestic saving and most likely tend to increase the trade deficit. Most economists believe that, in time, the trade deficit will correct itself, without crisis, under the pressures of normal market forces. But the risk of a more disruptive adjustment cannot be completely discounted.
This report will be updated annually.