The second factor that can affect a country`s current account balance is the exchange rate. The exchange rate refers to the amount of currency that can be purchased by a country`s own currency. According to economic theory, if a nation has a persistent trade deficit, its exchange rate is expected to fall against its trading partners – for example, if the United States has a persistent deficit, the dollar should buy fewer currencies like the euro or the yen. This would mean that imported products would cost more because they would cost more dollars for each unit of foreign currency, resulting in lower imports. In addition, U.S. exports are expected to grow, as foreigners can buy more of their products for any unit of their currency. Economists are not concerned about these cyclical trade deficits or surpluses. Moreover, they are not worried when there is a deficit, because the country borrows heavily abroad to finance investments that will then be repaid. During the 19th century, the United States remained in this position, when it invested heavily to build railways across the continent, steel mills and other long-term investments. That is not the situation in the United States today. Today, it borrows many other countries to finance short-term consumption, such as the newest and largest HDTVs in Japan or South Korea, and these purchases do not generate income to pay off their debts in the future.
However, a number of countries – including Japan, South Korea, China and a few other Far Eastern countries – have followed a model of neo-omercantilism in which they are trying to grow through aggressive export expansion, as well as a very moderate reduction in import barriers. These countries are trying to develop powerful export industries by first protecting their domestic industries from foreign competition and by providing subsidies and other aid to stimulate growth, often including currency manipulation. A current account surplus or deficit may be affected by the economic cycle. Therefore, if our economy grows rapidly, the demand for imports will increase, as consumers can afford to buy more and businesses will need parts and stocks to grow.