The Budget Deficit and the Trade Deficit: What Is Their Relationship?

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During the last half of the 1990s, real gross domestic investment rose as a fraction of real GDP. This resulted from the rise in U.S. productivity and the related rise in the real yield on U.S. assets. This drew additional private capital from abroad. If the twin deficits theory is correct, it has an adverse implication for the efficacy of fiscal policy as a stimulus tool. It suggests that in an environment of highly mobile international capital flows the effect of policy induced increases in the structural budget deficit (e.g., tax cuts) on short-run economic growth would be largely offset ... continued below

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6 pages.

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Labonte, Marc & Makinen, Gail March 24, 2005.

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This report is part of the collection entitled: Congressional Research Service Reports and was provided by UNT Libraries Government Documents Department to Digital Library, a digital repository hosted by the UNT Libraries. It has been viewed 2143 times . More information about this report can be viewed below.

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Description

During the last half of the 1990s, real gross domestic investment rose as a fraction of real GDP. This resulted from the rise in U.S. productivity and the related rise in the real yield on U.S. assets. This drew additional private capital from abroad. If the twin deficits theory is correct, it has an adverse implication for the efficacy of fiscal policy as a stimulus tool. It suggests that in an environment of highly mobile international capital flows the effect of policy induced increases in the structural budget deficit (e.g., tax cuts) on short-run economic growth would be largely offset by increases in the trade deficit. The experience during both the 1980s and 1990s demonstrates that a large and growing trade deficit need not be an impediment to overall job creation even though it may have had an effect on the type of jobs that were created since it affected the composition of U.S. output.

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6 pages.

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Congressional Research Service Reports

The Congressional Research Service (CRS) is the public policy research arm of Congress. This legislative branch agency works exclusively for Members of Congress, their committees and their staff. This collection includes CRS reports from the mid-1970's through the present--covering a variety of topics from agriculture to foreign policy to welfare.

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  • March 24, 2005

Added to The UNT Digital Library

  • Sept. 20, 2005, 11:05 a.m.

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  • Feb. 9, 2017, 2:53 p.m.

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Labonte, Marc & Makinen, Gail. The Budget Deficit and the Trade Deficit: What Is Their Relationship?, report, March 24, 2005; Washington D.C.. (digital.library.unt.edu/ark:/67531/metacrs7215/: accessed April 25, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.