Question

A country has been in current account deficit for more than a decade. What happened to its net international investment position? What would be the main implications of the chages to the country?

Answer 1

The current account can be expressed as the difference between the value of exports of goods and services and the value of imports of goods and services. A deficit then means that the country is importing more goods and services than it is exporting.

In the long run, a current account deficit weakens economic vitality. International investors doubts if the economic growth will provide enough return on their investment and demand weakens for the country's assets, and government bonds.Bond yields rise as foreign investors withdraw funds, even the national currency depreciate relative to other currencies which lowers the value of the assets in the foreign investors' strengthening currency. It further reduces investor demand for the country's assets which can lead to a tipping point where investors will dump the assets at any price.The current account deficit would lower the standard of living for the country's residents.