Current Account Deficit

AAA

DEFINITION of 'Current Account Deficit'

A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of 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 tend to make up a smaller percentage of the current account than exports and imports. The current account is a calculation of a country’s foreign transactions, and along with the capital account is a component of a country’s balance of payment.

INVESTOPEDIA EXPLAINS 'Current Account Deficit'

A current account deficit represents a 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.

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, it may become insolvent.

RELATED TERMS
  1. Budget Deficit

    A status of financial health in which expenditures exceed revenue. ...
  2. Balance Of Payments (BOP)

    A record of all transactions made between one particular country ...
  3. Current Account

    The difference between a nation’s savings and its investment. ...
  4. Capital Account

    A national account that shows the net change in asset ownership ...
  5. Balance Of Trade - BOT

    The difference between a country's imports and its exports. Balance ...
  6. Deficit

    The amount by which expenses exceed income or costs outstrip ...
RELATED FAQS
  1. Why do developed countries run current account deficits?

    A current account deficit occurs when the value of a nation's imports exceeds the value of its exports. This is also called ... Read Full Answer >>
  2. What is the difference between a nation's current account deficit and its currency ...

    Current account deficit and currency valuation are two macroeconomic measures related by virtue of the fact that each can ... Read Full Answer >>
  3. What is the difference between a current account deficit and a trade deficit?

    The terms current account deficit and trade deficit are often used interchangeably but in fact they have substantially different ... Read Full Answer >>
  4. How is free enterprise affected by monetary policy?

    Monetary policy is concerned with the quality, quantity and function of money instruments in an economy. Perhaps the best ... Read Full Answer >>
  5. What does it mean when a country has little activity in its capital account?

    Since a country's capital account represents money flow into the country through foreign investment, having only a small ... Read Full Answer >>
  6. What are the most effective ways to reduce moral hazard?

    There are a number of ways to reduce moral hazard, including the offering of incentives, policies to prevent immoral behavior ... Read Full Answer >>
Related Articles
  1. Economics

    What The National Debt Means To You

    The U.S. deficit seems to grow every year. But how does it actually affect you?
  2. Bonds & Fixed Income

    A Look At National Debt And Government Bonds

    Learn the functions of the U.S. Treasury, and find out how and why it issues debt.
  3. Economics

    Breaking Down The Balance Of Trade

    The balance of trade is a key indicator of a nation’s health. Investors and market professionals appear more concerned with trade deficits than trade surpluses, since chronic deficits may be ...
  4. Economics

    Exploring The Current Account In The Balance Of Payments

    Learn how a country's current account balance reflects the country's economic health.
  5. Personal Finance

    What Is International Trade?

    Everyone's talking about globalization, so we explain what is it and why some oppose it.
  6. Economics

    Globalization: Progress Or Profiteering?

    Proponents of globalization argue that it helps the economies of developing nations and makes goods cheaper, while critics say that globalization reduces domestic jobs and exploits foreign workers. ...
  7. Forex Education

    Global Trade And The Currency Market

    Learn how the Bretton Woods system got the ball rolling for world trade.
  8. Options & Futures

    Breaking Down The U.S. Budget Deficit

    Find out why this particular piece of national financing gets so much attention from the media and investors.
  9. Budgeting

    Current Account Deficits: Government Investment Or Irresponsibility?

    Deficit can be a sign of trouble for some countries, and of health for others. Find out what it means when more funds are exiting than entering a nation.
  10. Economics

    In Praise Of Trade Deficits

    When a country imports more than it exports, is it a recipe for disaster or just part of a larger cycle?

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center