The Value Of High U. S. Economic Growth Since 1975 And Why The Trade Deficit May Not Be A Problem

See With Reforms in China, Time May Correct U.S. Current Account Imbalance by Jian Wang of the Dallas Fed. He says:

"Since the mid-1970s, economic expansion in the U.S. has outpaced that of other industrial countries. GDP on average grew 2.82 percent in the U.S. between 1975 and 2009, compared with 1.87 percent for Germany and 2.33 percent for Japan."

The following gives us an idea of how important these differences can be:

If per capita GDP goes up 1 percentage point less than that to take population growth into account, we would have a per capita growth rate per year of 1.8%.

If 30 years ago per capita GDP was $27,500 then today it would be about $46,900 (actually close to what it really was last year). But what if we had only grown 1.3% per year? The per capita GDP would be only $40,500. That would be $6,000 less, which is big and that kind of difference just keeps getting bigger over time and that is only a .5% lower growth. This big difference is due to compound interest.

In 2010, the U. S. per capita GDP was actually $47,400 and in Japan it was $34,400.

Wang also reports:

"A large share of the U.S. current account deficit before 2005 was with other industrial countries, such as Germany and Japan. This behavior makes economic sense, argue Charles Engel, a University of Wisconsin–Madison economics professor, and John Rogers, a Federal Reserve Board economist.[1] These trade deficits/surpluses simply reflect the difference in growth prospects between the U.S. and other major industrial nations. If the U.S. continues to outperform other industrial countries, it is optimal to borrow from these nations now and incur a current account deficit. Assuming that the difference in economic growth between the U.S. and other industrial countries over the past 30 years continues for another 20 years, Engel and Rogers found that a standard economic model could justify a U.S. current account deficit at its 2004 level, the end of the period covered in their research."