In the past decade, the large deficit current account in the U.S. and the huge surplus current account in China have been a main feature in the world economy. This situation has generated concern among analysts and policy makers. Obstfeld (2010) states that “the connection between the much-debated global current account imbalances of the past decade and the U.S. financial collapse is an intimate one, although nothing as simple as cause and effect. Instead, the imbalances were a primary symptom of forces that led to the financial crash.” Many economists have argued that this deficit and surplus in the U.S. and in China are unsustainable and that, at some point, situations would reverse. Just as Feldstein (2008) said that “the large trade and current account deficit of the U.S. cannot continue indefinitely because doing so would constitute a permanent gift to the U.S. economy.”
The improvement of the U.S. current account implies the sum of current accounts in other countries would be deteriorated. In the thesis, within two periods’ intertemporal model and combining the data from the World Bank and other sources, we find reasons why current accounts are imbalance in the U.S. and in China, respectively. And under assumptions and optimal conditions, current accounts in these two countries would reverse and would reach sustainable levels in the future. Nevertheless, it’s hard to use this model to explicitly explain the real world, since there are some shortcomings in the model, such as the reason of high gross domestic savings, the arbitrary timing division and so on.
The specie-flow mechanism and Mundell-Fleming-Tobin model are much closer to the reality, which avoid some disadvantages of the intertemporal model. As the analysis, just by the market power or under the effect of exchange rate changes, the current accounts in the U.S. and in China would reach sustainable levels, i.e. zero in future. However, the application of the specie-flow mechanism and the Mundell-Fleming-Tobin model also has some demerits, as it ignores some important factors, such as investment, the productivity, the capital stock and some random factors in the real life, which have influences on the current account to some extent.
About when current accounts in the U.S. and in China will reach their sustainable levels, I think only history could tell us the truth.