If U.S. Sneezes the World Catches Cold

Topics: United States, Economy of the United States, Purchasing power parity Pages: 3 (956 words) Published: August 30, 2008
If the US economy sneezes the world catches cold-

There has been an intriguing competition of bombarding between the United States and the economists. The US bombarding countries like Iraq and economists bombarding us with words such as week US economy, recession, decoupling, stronger emerging economies etc. So, to analyze the above proposition we ask the question “is united states economy is really the godfather of all economies of the world?” To answer this question we consider two aspects

1.The GDP and consumption expenditure of U.S.
2.Trade Balance and external debt of U.S.
For some time now we have been eulogizing the emergence of China and India in the world economic forum. However the GDP of China is at $3.3 Trillion and that of India is 1.1 trillion. The GDP of us stands at a staggering $13.8 trillion (World Bank estimates). Even at purchasing power parity (ppp) or simply the law of one price-U.S.’ GDP is double of that of any country. In fact the U.S. and European Union together correspond to nearly 45% of world’s GDP. Now, take into account the fact that by nature Indians and Chinese are savers. The household domestic savings in India is about 23% and China more than 25% significantly less than the U.S. The marginal propensity to consume in India is .65 while that in U.S. is about .9. Thus, if we calculate the consumption expenditure then India’s total consumption would be about .7 trillion, China’s 2 trillion and that of U.S. more than 10 triilion.

Now lets consider the economics of the trade dynamics of U.S. US has a high trade deficit. It is a net importer of goods. 50% of its total imports come from countries such as China, Japan and germany.U.S. has a trade deficit of 20 million with China, with China exporting large amount of manufacturing, engineering and finished goods. India is a vast exporter of services to the U.S. U.S. is also a huge debtor in the world market. Of the total external debt floating in the world, 22% of that...
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