531:
241:
585:
693:
One way to understand this process intuitively is by thinking through two different markets. First consider the
Foreign Exchange market. At equilibrium the quantity supplied = the quantity demanded. Thus, Imports + Capital outflow = Exports + Capital Inflow. Rearranging this equation we find that
623:
In the case of the United States, the twin deficit graph as a percentage of GDP shows that the budget and current account deficits did move broadly in sync from 1981 until the early 1990s, but since then, they have moved apart. Data thus confirm that as a government budget deficit widens, the current
516:
Though the economics guiding which of the two is used to finance the government deficit can get more complicated than what is shown above, the essence of it is that if foreigners' savings pay for the budget deficit, the current account deficit grows. If the country's own citizens' savings finance the
710:
What we can gather from this is the understanding of why an increased budget deficit goes up and down in tandem with the Trade
Deficit. This is where we derive the appellation the Twin Deficits: if the US budget deficit goes up then either household savings must go up, the trade deficit must go up,
697:
Next we must consider the market for loan able funds. The equilibrium here is Saving + Net
Capital Inflow = Investment + Budget Deficit. However, taking the Forex market into consideration we know that the Trade Deficit is equal to Net Capital Inflow. We can thus substitute for:
694:
Imports – Exports = Capital Inflow – Capital
Outflow. Because Imports – Exports = Trade Deficit and Capital Inflow – Capital Outflow = Net Capital Inflow, we get the equation Trade Deficit = Net Capital Inflow (or Current Account deficit = Capital Account Surplus).
580:
In the US, the budget deficit is financed about half from foreigners, half domestically. Therefore, with an additional $ 400 billion deficit, the trade deficit would, according to the theory, be increased by some $ 200 billion.
508:
Now, assume an economy already at potential output, meaning Y is fixed. In this case, if the budget deficit increases, and saving remains the same, then this last equation implies that either investment (I) must fall (see
497:
683:
111:
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774:
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335:
194:
375:
47:
Standard macroeconomic theory points to how a budget deficit can be a contributing factor to a current account deficit. This link can be seen from considering the
136:
stands for net exports. This represents GDP because all the production in an economy (the left hand side of the equation) is used as consumption (
858:
513:), or net exports (NX) must fall, causing a trade deficit. Hence, a budget deficit can also lead to a trade deficit, causing a twin deficit.
597:
36:
801:
567:
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690:
In the above equation, it is verifiable that CA will deteriorate as government expenditure exceeds the amount of tax is collected.
215:
is taxes. This is because national income is also equal to output, and all individual income either goes to pay for consumption (
868:
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720:
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32:
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borrowing, it may cause a crowding out effect (in an economy at or near potential output, or full employment).
510:
792:"Twin deficits and the Feldstein-Horioka puzzle: a comparison of the EU member states and candidate countries"
152:). Another equation defining GDP using alternative terms (which in theory results in the same value) is
608:. In effect, the economy is borrowing from foreigners in exchange for foreign-made goods. Traditional
437:
624:
account falls, but the relationship is complicated by what happens to investment and private saving.
588:"Double deficit" in the USA. Fiscal balance (black) and current account balance (red). Source: ameco.
629:
57:
430:
48:
740:
Miller, Stephen M.; Russek, Frank S. (1 October 1989). "Are the Twin
Deficits Really Related?".
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342:
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31:, is the observation that, theoretically, there is a strong causal link between a nation's
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Current
Account = (Private Saving – Investment) + (Taxes levied – Government Expenditure)
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predicts that persistent double deficits will lead to currency
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Understanding the Twin
Deficits: New Approaches, New Results
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Understanding the Twin
Deficits: New Approaches, New Results
790:
http://mpra.ub.uni-muenchen.de/24149/1/MPRA_paper_24149.pdf
707:
Budget
Deficit = Saving + Trade Deficit – Investment.
701:
Saving + Trade
Deficit = Investment + Budget Deficit.
632:
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148:), and goods that are exported in excess of imports (
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817:Ghosh, Atish; Ramakrishnan, Uma (December 2006),
596:is deemed to have a double deficit if it has a
8:
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568:Learn how and when to remove this message
439:
384:
344:
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278:Learn how and when to remove this message
160:
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704:Rearranging algebraically we find that:
732:
819:"Do Current Account Deficits Matter?"
711:or private investment will decrease.
7:
120:represents national income or GDP,
754:10.1111/j.1465-7287.1989.tb00577.x
540:tone or style may not reflect the
250:tone or style may not reflect the
14:
780:, Michele Cavallo, July 22, 2005
550:guide to writing better articles
529:
501:If (T-G) is negative, we have a
492:{\displaystyle (S-I)+(T-G)=(NX)}
260:guide to writing better articles
239:
620:that can be severe and sudden.
678:{\displaystyle CA=(S-I)+(T-G)}
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106:{\displaystyle Y=C+I+G+(X-M),}
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1:
859:United States federal budgets
802:Ameco-data base November 2007
742:Contemporary Economic Policy
132:is government spending and
885:
721:Double Deficit (economics)
426:, which simplifies to the
419:{\displaystyle S=G-T+NX+I}
330:{\displaystyle Y=C+I+G+NX}
33:government budget balance
189:{\displaystyle Y=C+S+T,}
144:), government spending (
29:twin deficits phenomenon
25:twin deficits hypothesis
823:Finance and Development
370:{\displaystyle Y-C-T=S}
211:is private saving, and
37:current account balance
16:Hypothesis in economics
869:Macroeconomic theories
864:Union budgets of India
840:FRBSF Economic Letter.
775:FRBSF Economic Letter
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854:Government finances
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544:used on Knowledge
542:encyclopedic tone
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614:devaluation
848:Categories
727:References
43:Definition
762:1465-7287
667:−
649:−
466:−
448:−
396:−
356:−
350:−
92:−
715:See also
600:deficit
558:May 2021
431:identity
268:May 2021
35:and its
594:economy
521:Example
377:, then
27:or the
760:
337:, and
290:Since
199:where
116:where
23:, the
231:Proof
758:ISSN
829:(4)
750:doi
602:and
592:An
227:).
134:X–M
19:In
850::
827:43
825:,
821:,
756:.
744:.
604:a
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150:NX
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764:.
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746:7
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670:G
664:T
661:(
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652:I
646:S
643:(
640:=
637:A
634:C
616:/
571:)
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475:=
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463:T
460:(
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451:I
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442:(
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408:X
405:N
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390:=
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365:S
362:=
359:T
353:C
347:Y
325:X
322:N
319:+
316:G
313:+
310:I
307:+
304:C
301:=
298:Y
281:)
275:(
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266:(
256:.
225:S
221:T
217:C
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209:S
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201:Y
184:,
181:T
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169:C
166:=
163:Y
146:G
142:I
138:C
130:G
126:I
122:C
118:Y
101:,
98:)
95:M
89:X
86:(
83:+
80:G
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71:+
68:C
65:=
62:Y
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