The purpose of this study is to answer the following questions by using the macro-econometric model: What are the causes of the worsening U.S.balance of payments in the late 1950's and 1960's? Particularly, how did direct investment abroad exert its influence on the U.S.balance of payments?
Some economists argue that the causes of the unfavorable balance of payments in this period are (i) the slowdown of the rate of technical progress, (ii) the increase of government expenditures, especially military expenditures, and (iii) the sharp increase in direct investment abroad.
In order to analyse the effects of these factors on the balance of payments, I extended the foreign sector of the revised version of the Klein-Goldberger model to include the long-term capital accounts.
Our model consists of 21 structural equations and 15 identities. Estimation method of the structural equations is the ordinary least squares method and the sample period is 1951-1970.
The so-called final test shows that the model is able to explain, with a tolerable degree of accuracy, the actual course of the American economy over the sample period.
The results of several simulations can be summarized as follows.
(i) The slowdown of the rate of technical progress in 1950's, was not the cause of the unfavorablebalance of payments though it decreased the domestic product in the 1950's.
ii) The slowdown of the rate of technical progress and the increase of government expenditures after 1965 played an important role in the inflation and the unfavorable balance of payments.
(iii) Simulations indicate increases in the foreign direct investment worsen the balance of payments in the short run, while they improve it in the long run.