Question

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

Answer 1

Current account balance refers to the difference between exports of goods and services and import of good and services by a country. It is said to be in deficit when imports by a country exceed its exports. Whether a current account deficit is something to worry or not depends on the kind of goods that are imported and how they are financed.
If a country is simply importing consumer goods more then it must finance them by some means. Often the source of finance is borrowing. Thus, if imported consumer goods are financed by borrowing then it can be worrisome. However, a country may also import capital goods which will improve the productive capacity of the economy. In such a case, it is not something to worry about since the returns will show up after some time.

A case where current account deficit may not a cause for concern is when the country is importing some machinery and it is getting financed by investment expenditure. Recall the national income identity is Y = C + I + G + X -M.
Thus even if M is increasing but I also increasing, then overall output level may not fall. Hence, it may not be worrisome even in this case also.