A:

A current account deficit occurs when the value of a nation's imports exceeds the value of its exports. This is also called the "balance of payments deficit" or simply "trade deficit," although there are minor technical differences between a trade deficit and a current accounts deficit. Generally speaking, the current account is the mirror image of capital and financial accounts. There is no real difference between a current account deficit run by a developed country versus a less-developed country.

However, developed countries tend to run more current account deficits than their less-developed counterparts. There are two primary reasons for this. First, less-developed countries tend to have a comparative advantage in creating many types of consumer goods or services as jobs "ship overseas." Cheap land and labor tends to be more abundant in less-developed countries. The second reason is that developed nations tend to spend more money and are much safer destinations for capital investments.

Many people are confused by the current accounts deficit and see it in a negative light. This may simply revolve around the connotations with the word "deficit." If, instead, the current accounts deficit was referred to as a "capital accounts surplus," which is just as accurate, it might not receive the same negative press.

In an extremely simplistic example, consider the following two-country scenario involving developed Country A and less-developed Country B. Country A purchases textiles from Country B because the goods can be produced more cheaply in Country B than at home. Now, holding Country A dollars, Country B turns around and invests those dollars in Country A because it is a safer place to earn a return. Both countries benefit: Country A receives cheaper goods and a greater capital stock, while Country B receives employment in textiles, income and hopefully an improved return on investments abroad.

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