What is the underlying cause of a current account deficit and explain when this is (and...

What is the underlying cause of a current account deficit and explain when this is (and is not) a problem for a country.

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Expert Solution

Current account deficit (CAD) is a situation where the imports of the country exceeds the exports. Such a situation occurs when the money value of imports is greater than the money value of exports. If the currency is overvalued, and when there is higher consumer spending on imports, there will be higher quantity of imports than the exports. Thus, the situation of current account deficit arises.

A current account deficit is helpful to the borrowing nation in the short run. Foreign investors will be willing to invest into the country. This will lead to economic growth.

But in the long run, a CAD will weaken the economic growth. Domestic businesses will be affected by foreign competition since imports are more. Jobs opportunities will be outsourced to other countries. Investors will doubt about the return on their investment since the value of the currency is falling. This will prevent the economic growth of the country.

jeff jeffy answered 1 year ago

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