Question

Does a Current Account Deficit mean that a nation's savings is less than its investments and thus imports more than it exports meaning total expenditures exceed the value of its output?

Answer 1

All of a nation's economic transactions (of any form) are recorded in the balance of payments. Balance of payments is made up of two components, the current account and the capital account. Current account is a record the trade and net cash transfer transactions between a nation and the rest of the globe. Capital account, on the other hand, is a record of the financial investments (e.g. investment in the country's stock market) and changes occurring in the nation's central bank forex reserves.

The record of all trade and net cash transfer transactions in the current account implies a record of all exports and imports made from and to a country, income received from investments abroad or income paid on domestic investments to foreign nations and international receipts and remittances. A current account deficit, in most general terms, implies that the expenditure incurred by a nation at the international level is more that the income generated internationally. This can be broken down to mean that imports are more than exports and/or remittances abroad are more than receipts in the country.

However, current account does not pertain to a nation's savings or the value of the output generated within the country in any given year.

In conclusion, a current account deficit implies that imports are more than exports but it does not mean that the nation's savings are less than its investments or total expenditure is more than the value of the output generated in the economy.