In the 1980s, the U.S. was said to have suffered from what was called twin deficits. One deficit is the government’s deficit (Goverment Purchases of Goods and Services + Transfer Payments – Taxes), and the other deficit is the trade deficit (Imports – Exports, or –NX). These are also called the fiscal deficit and the current account deficit. The two deficits were “twins” because they moved together in the 1980s.
However, since then, the twins no longer moved together.

a. If the United States saves what it invests, how are the two deficits going to be related?

b. In the 1990s, the U.S. government was running a surplus while the trade deficit (exports exceeding imports) still existed. What does this say about what has been happening to investment and savings?

c. One school of economic thought argues that an increase in the deficit means higher future taxes and people saving an equivalent amount now to pay for the higher taxes later. In this case, changes in the government deficit are matched by changes in savings. If this does occur, how would investment and the trade deficit be related?