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.

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 2 years ago

Is a current account deficit something to worry about? Explain a case that current account deficit...

Is a current account deficit something to worry about? Explain a case that current account deficit might not be something to worry.

Can there be a deficit on current account and a deficit on capital account at the...

Can there be a deficit on current account and a deficit on capital account at the same time? Explain, giving an example.

what is the current account balance? what does a current account deficit do that is positive...

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)

Explain the difference between a trade deficit, a current account deficit, and a balance of payments...

Explain the difference between a trade deficit, a current account deficit, and a balance of payments deficit. Explain fully why a current account deficit can be good for a country.

Q5: Consider Australia running a current account deficit a/ Evaluate the statement “a current account deficit...

Q5: Consider Australia running a current account deficit a/ Evaluate the statement “a current account deficit is a tax burden on future generations”. Explain your working and answer in words. b/ Calculate the nominal exchange rate using the purchasing power parity concept when the foreign price level (for a typical easily transportable basket of goods) is $100USD and the domestic price level is $150AUD. Explain your working and answer in words. c/ Calculate the real interest rate if inflation is...

Which of the following will balance a country when it has a current account deficit? a....

Which of the following will balance a country when it has a current account deficit? a. Gross financial outflows b. Gross financial inflows c. Net financial inflows d. Net financial outflows

True or False 1. When a country has a current account deficit, it means the country...

True or False 1. When a country has a current account deficit, it means the country has accumulated foreign assets in a given period. 2. The trade balance is NOT the most important component of the BOP

can there be deficit between current account and capital account at the same time.Explain?

Some economists are not worried about the record current account deficit of the United States. Explain...

Some economists are not worried about the record current account deficit of the United States. Explain why that might be the case. Compare it with the situation of countries like Mexico and Brazil in the 80s and 90s. Please provide a full answer.

Problem 1.1: Making Sense of the Trade Deficit a) Explain the difference between the current account...

Problem 1.1: Making Sense of the Trade Deficit a) Explain the difference between the current account and the capital and financial account in the balance of payments. b) What is a trade deficit? c) Assume a U.S. firm buys (imports) $5 million (in U.S. dollars) of foreign goods. That transaction by itself increases the trade deficit by $5 million. But, the $5 million will flow back to the United States to purchase either (i) U.S. goods and services or (ii)...

Question