Cambridge International as and a level Economics Ebook

SELF-ASSESSMENT TASK 
4.5
Th
e USA’s current account defi cit in 2005 reached 
6.2% of GDP, which suggested the country was living 
signifi cantly beyond its means. By 2013, it had fallen 
to 2.5%, a level it could sustain. Import penetration 
had fallen from 35% of durable goods purchased in 
2005 to 31% in 2013.
Th
e defi cit had declined partly due to a rising 
surplus in investment income. Th
e main cause, 
however, was a reduction in the trade in goods 
defi cit. Output and productivity had risen in 
the country. Th
ere had also been demographic 
changes, with a rise in the average age of the 
population. Older people tend to spend more on 
services, which are mostly produced at home, and 
less on goods.
1
What is meant by ‘import penetration’?
2
Explain what would cause an increase in 
investment income.
3
Explain 
two
reasons why the US’s trade in goods 
balance improved.
A financial account deficit
A financial account deficit is not necessarily a problem, 
especially as it will give rise to an inf low of profits, 
interest and dividends in future years. It may also be 
short-term, resulting from hot money f lowing out of 
the country in search of higher interest rates and in 
expectation that other currencies may rise in value. 
It is more of a concern, however, if it results from a 
long-term lack of confidence in the country’s economic 
prospects. Indeed, such a concern might result in a 
capital f light. Foreign owners of firms and shares in 
the country may sell these in large quantities. This 
movement of firms and funds out of the country 
reduces tax revenue and employment and may result in 
the country moving into a recession.
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