Current Account Deficit

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A current account deficit occurs when a country spends more money on the goods and services it imports than it receives for the goods and services it exports. In other words, more money is leaving the country than flowing into it. The current account consists of money received and paid out for goods, services, investments, salaries, pension payments to foreign workers and money workers send to family members abroad.

When a country has a current account deficit, it must make up for the shortfall. A current account deficit is financed from the capital account and the financial account, which contain the money a country sends out and brings in from buying and selling tangible assets and foreign currency and from foreign direct investment.

Current account deficits are common in highly developed countries and in highly underdeveloped countries. Countries with emerging markets typically have current account surpluses. 

Whether a current account deficit is bad or not depends on why it exists and how it is being paid for. A current account deficit might exist because a country is importing the inputs for goods it will export later; it may then create a current account surplus. It can also mean that foreign investors see the country as a desirable place to invest. While the domestic country will pay returns to those foreign investors, the additional capital can help expand the domestic economy.

On the other hand, a country could be overspending on expensive exports when it would be better off increasing domestic production. Also, a longstanding current account deficit could saddle future generations with debt and interest payments. A current account deficit also puts a country at risk of facing financial or political pressure from foreign suppliers.

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