Question

what is the current account balance? what does a current account deficit do that is positive for a nation? are here any thresholds between safe and dangerous levels of a deficit? (use the main accounting identity)

Answer 1

A country’s current account is one of the essential components of balance of payments. Current account remains in balance when a country’s citizens have enough funds for all the purchases in the country. The country will take more earnings than it spends. The exports of the nation are recorded as credits in balance of payments, whereas imports as debits the positive current account balance represents the nation’s leadership to the rest of the world, the negative balance of the current account represents that the nation is net borrower.

The current account deficit can occur during the surplus period on financial account. This type of inward investment can help in creating more and more jobs as well as investments in the country. The high current account deficit compels the government to impose relevant restrictions on the non-essential things like gold. The deficit creates increased money supply which leads in increased growth rate and productivity, which results in growth of the country.

A very high level of balance of payments deficit, at any point, can cause loss of confidence by the investors. There is always a risk of investors removing their investments causing big decrease in value of the currency. This results in decreasing living standards and confidence for investments. A persistent current account deficit can imply that a country is relying on consumer’s spending, and economy becoming unbalanced between various sectors and between long-term investment and short-term consumption.