Current Account Deficit
Definition: A current account deficit is when a country's government, businesses and individuals import more goods, services and capital than they export. That's because the current account measures trade, as well as international income, direct transfers of capital, and investment income made on assets, according to the Bureau of Economic Analysis.
When those within the country rely on foreigners for the capital to invest and spend, that creates a current account deficit. Depending on why the country is running the deficit, it could be a positive sign of growth, or it could be a negative sign that the country is a credit risk.
What Are the Components of a Current Account Deficit?
The largest component is the trade deficit. That's when the country imports more goods and services than it exports.
The second largest component is a deficit in net income. This is when foreign investment income exceeds the savings of the country's residents. This foreign investment can help a country's economy grow. However, if they don't get a return on their investment in a reasonable amount of time, they will withdraw their funds, causing a panic. Net income is measured by payments made to foreigners in the form of dividends of domestic stocks, interest payments on bonds, and wages paid to foreigners working in the country.
The last component of the deficit is the smallest, but often the most hotly contested. These are direct transfers, which includes government grants to foreigners. It also includes any money sent back to their home countries by foreigners.
What Causes a Current Account Deficit?
Countries with current account deficits are usually big spenders that are considered very credit worthy. These countries' businesses can't borrow from their own residents, because they haven't saved enough in local banks. Businesses in a country like this can't expand unless they borrow from foreigners. That's where the credit-worthiness comes into the picture. If a country has
When those within the country rely on foreigners for the capital to invest and spend, that creates a current account deficit. Depending on why the country is running the deficit, it could be a positive sign of growth, or it could be a negative sign that the country is a credit risk.
What Are the Components of a Current Account Deficit?
The largest component is the trade deficit. That's when the country imports more goods and services than it exports.
The second largest component is a deficit in net income. This is when foreign investment income exceeds the savings of the country's residents. This foreign investment can help a country's economy grow. However, if they don't get a return on their investment in a reasonable amount of time, they will withdraw their funds, causing a panic. Net income is measured by payments made to foreigners in the form of dividends of domestic stocks, interest payments on bonds, and wages paid to foreigners working in the country.
The last component of the deficit is the smallest, but often the most hotly contested. These are direct transfers, which includes government grants to foreigners. It also includes any money sent back to their home countries by foreigners.
What Causes a Current Account Deficit?
Countries with current account deficits are usually big spenders that are considered very credit worthy. These countries' businesses can't borrow from their own residents, because they haven't saved enough in local banks. Businesses in a country like this can't expand unless they borrow from foreigners. That's where the credit-worthiness comes into the picture. If a country has