Question

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.

Answer 1

Trade deficit is the amount by which the cost of a country's imports exceeds the value of its exports . On the other hand a current account deficit occurs when a country spends more on imports than the income it receives from exports . The CA deficit is a wider definition which encompasses the trade deficit along with other components . Trade deficit is only about import and export but CA deficit calculates the total money leaving the country and entering in forms of salaries , pensions also and not only exchange of goods and services .

Balance of payments is the calculation of current account , capital account and financial account together . CA is a part of balance of payments . Balance of payments deficit occurs when there is more outflow of money than inflow .

A CA deficit means that value of goods and services imported is higher than the value of goods and services exported . A current account deficit can be beneficial , foreigners are willing to invest capital into the home country to drive economic growth . Thus the total investment of home country rises due to foreign money inflow which accelerates the economy . Also more imports means more competition in domestic market which leads to more production .