A country’s current account deficit is the net outflow of goods, services, investment income, and transfers. The current account can be in balance, deficit, or surplus, but must be offset by an equal balance in the capital account. The current account includes all income and expenditure, and a deficit must be offset by a capital account surplus.
A country’s current account deficit is equal to the net outflow of goods, services, investment income and transfers. A country’s current account can be in balance, in deficit, or in surplus at any time. Whether in surplus or deficit, the non-zero balance in the current account must be offset by an equal and opposite balance in the capital account. Together, the current account and the capital account make up a country’s balance of payments and must always be equal to zero.
To better understand a current account deficit, it is important to understand what is included in the current account. The current account includes all items of income and expenditure in a country’s economy: imports and exports of goods and services, investment income and transfer payments. In the past, the trade balance was a focus of macroeconomists, with mercantilist policy focused on increasing exports and decreasing imports to achieve a trade surplus. Surpluses were considered to be favorable trade balances, and many countries continue to work towards trade surpluses, believing that they are best for the economy.
Modern macroeconomists try to focus more on the overall current account balance, in part because trade deficits are not always bad for an economy, and in part because transfers from services and investment income have come to play a more important role in the economy. international trade. Checking account services include items such as foreign travel, remittance, and financial services. Investment income includes income from foreign investments or home country assets abroad. The current account balance is net of exported and imported goods, plus net of exported and imported services, plus net of investment income entering and leaving the country, plus net transfers, which represent payments that are not in exchange of goods and services as foreign aid. Thus, depending on the volume of income and expenses, the current account may be in surplus or deficit – or, theoretically, in perfect balance.
When the current account is in deficit, a country must find a way to pay for the additional goods and services it has purchased. The capital account consists of all asset transactions between the home country and other countries. In other words, the capital account includes all loans or loans between one country and others. Included in the capital account are private loans and loans, as well as government loans and borrowing, through changes in official foreign reserves or the purchase and sale of government securities. The key is that a current account deficit must be offset by a capital account surplus for the international balance of payments to equal zero.
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