Current Account Deficit

Loading the player...

What is a 'Current Account Deficit'

Current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the goods and services it exports. The current account also includes net income, such as interest and dividends, as well as transfers, such as foreign aid, though these components make up only a small percentage of the current account when compared to exports and imports. The current account is essentially a calculation of a country’s foreign transactions and, along with the capital account, is a component of a country’s balance of payment.

BREAKING DOWN 'Current Account Deficit'

A current account deficit represents negative net sales abroad. Developed countries, such as the United States, often run current account deficits, while emerging economies often run current account surpluses. Countries that are very poor tend to run current account deficits.

Managing a Current Account Deficit

A country can reduce its current account deficit by increasing the value of its exports relative to the value of imports. It can place restrictions on imports, such as tariffs or quotas, or it can emphasize policies that promote exports, such as import substitution industrialization or policies that improve domestic companies' global competitiveness. The country can also use monetary policy to improve the domestic currency’s valuation relative to other currencies through devaluation, since this makes a country’s exports less expensive.

While a current account deficit can be considered akin to a country living “outside of its means," having a current account deficit is not inherently bad. If a country uses external debt to finance investments that have a higher return than the interest rate on the debt, it can remain solvent while running a current account deficit. If a country is unlikely to cover current debt levels with future revenue streams, however, it may become insolvent.

Real World Example of Current Account Deficit Fluctuations

Fluctuations to a country's current account are largely dependent on market forces. Even countries that purposefully run a current account deficit have volatility to that deficit. The United Kingdom, for example, saw a decrease in its current account deficit after the results of the Brexit vote.

The United Kingdom has traditionally run a current account deficit because it is a country with excessive imports financed through high levels of debt. A large portion of the country's exports are commodities, and declining commodity prices have resulted in lower earnings for domestic companies. This translates to less income flowing back into the United Kingdom, thereby increasing its current account deficit.

However, after the British pound declined in value as a result of the Brexit vote on June 24, 2016, the weaker pound actually decreased its current account deficit. This is due to the fact that overseas dollar earnings are higher for domestic commodity companies, resulting in more cash inflows to the country.

Trading Center