Question

Explain why economies with financial account surpluses usually have current account deficits.

Answer 1

The current account deficit is a measure of the economy of a nation in which the value of the goods and services that it imports exceeds the value of the items it exports. The current account contains net profits, such as interest and dividends, and contributions, such as foreign assistance, but those elements constitute just a small percentage of the overall current account. The current account reflects the international transactions of a country, and is a part of the balance of payments (BOP) of a country, like the capital account.

A nation with a current-account deficit will wisely spend foreign capital that it earns. To improve foreign trade it should develop roads and ports, and educate its workers. Leaders of the country will create a surplus for current account as soon as possible. They would boost domestic efficiency and its local business competitiveness. This should also aim to reduce imports of essential commodities, such as oil and food, by improving the domestic capacity.

A current account deficit indicates a nation imports more than they export. Emerging markets often have surpluses, and developing countries continue to run shortfalls. A current account deficit isn't necessarily harmful to the economy of a nation external debt can be used to finance profitable investment.

A deficit in the current account reflects negative net profits overseas. Developed nations, such as the United States, frequently run deficits, while developing economies also have surpluses in their current account. Deprived countries continue to bear current account debt.