Current Account Deficit vs. Trade Deficit: An Overview
The terms current account deficit and trade deficit are often used interchangeably, but they have substantially different meanings.
- A nation has a trade deficit when it spends more on imports than it earns on exports.
- A nation's current account deficit is a broader measure. The trade deficit is almost always the largest component of the current account deficit but it includes other numbers such as foreign aid and international investment.
It is, in fact, possible for a nation to have a current account deficit when it does not have a trade deficit, but that is highly unusual.
- A nation has a current account deficit when it sends more money to sources abroad than it receives from sources abroad.
- A trade deficit is normally the largest component of a current account deficit.
- The trade deficit or surplus reflects the total value of all goods exported and all goods imported.
- As of the end of 2020, the U.S. has the world's largest current account deficit while China has the world's largest current account surplus.
Current Account Deficit
A nation's current account balance may be either a deficit or a surplus, depending on whether its total receipts from other countries are less than or greater than its total payments to other countries.
A current account deficit occurs when a country sends more money abroad than it receives from abroad. If the nation receives more money from abroad than it sends, it has a current account surplus.
The U.S. Bureau of Economic Analysis defines the current account balance as "the combined balances on trade in goods and services and income flows between U.S. residents and residents of other countries."
The bulk of the deficit (or surplus) usually reflects the total of the receipts and payments for its trade with other nations. However, it includes dollar numbers for other factors such as:
- Foreign aid sent to the nation and received by it
- Foreign business investment in the country and investments abroad by the country's businesses
- Foreign purchases of financial assets such as stocks and bonds, and purchases of assets abroad by the nation's residents
- Money sent by individuals to family members abroad or received from family abroad
- Salaries and pensions that are paid to people abroad and paid to people in the home country
Current Account Deficit in the U.S. and Abroad
As of the second quarter of 2021, the U.S. had a current account deficit of $190.3 billion.
For 2020 as a whole, the U.S. current account deficit stood at $635 billion, the world's highest deficit and an increase by about a third over the previous year. That number represents about 3.1% of the nation's gross domestic product.
The same year, China became the nation with the world's largest current account surplus, surpassing Germany, according to a report by the Reuters news agency.
Is a Current Account Deficit a Good or Bad Thing?
A current account deficit isn't always a bad thing.
A country may have a deficit because it is importing large quantities of the raw materials it needs to produce goods and services it will export in the future. Its long-term strategy is to create a current account surplus, which ultimately makes it an attractive investment opportunity for foreigners.
The deficit may be problematic, though, if a country allows continued overspending on imports when it could be spending money on domestic production.
At the most basic level, a deficit means that more cash is going out than is coming in. And that money has to be made up from some other source, whether it is higher taxes or more debt.
The trade deficit or trade surplus is almost always the largest component of its current account balance. It is the total value of its trade with foreign countries. If it exports more than it imports, it will have a trade surplus. If it imports more than it exports, it will have a deficit.
The U.S. almost always has a trade deficit, often referred to as "the trade gap."
For 2020, the U.S. trade gap was $678.7 billion, up from $576.9 billion the year before, according to the Bureau of Economic Analysis.
The United States has run a trade surplus in only five years since 1968.
The only ways that a country can manage a trade deficit are to borrow money or raise taxes to make up for the shortfall.
The United States has been running the world's largest trade deficit. As of August 2021, the country's trade deficit totaled $73.3 billion, according to the U.S. Census Bureau. The country's deficit has been climbing mainly because of increases in the import and consumption of materials such as crude oil and products such as electronics.