Loading the player...

What is a 'Current Account Deficit'?

The 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 includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account. The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments.

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. Extremely poor countries 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 export, 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, which reduces the country’s export costs. 

While a current account deficit can imply that a country is spending “beyond its means," having a current account deficit is not inherently disadvantageous. If a country uses external debt to finance investments that have higher returns 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.

Examples of Current Account Deficit Fluctuations

Fluctuations in a country's current account are largely dependent on market forces. Even countries that purposefully run current account deficits have volatility in the deficit. The United Kingdom, for example, saw a decrease in its current account deficit after the Brexit vote results in 2016.

The United Kingdom has traditionally run a current account deficit because it is a country that uses high levels of debt to finance excessive imports. 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, increasing its current account deficit.

However, after the British pound declined in value as a result of the Brexit vote on June 23, 2016, the weaker pound decreased the nation's current account deficit. This occurred because overseas dollar earnings were higher for domestic commodity companies, resulting in more cash inflows to the country.

RELATED TERMS
  1. Deficit Net Worth

    Deficit net worth is a scenario in which a person's or business' ...
  2. Trade Surplus

    A trade surplus is an economic measure of a positive balance ...
  3. Official Settlement Account

    An official settlement account is an account used to keep track ...
  4. Deficit Hawk

    Slang for someone who wants the government to keep the federal ...
  5. Merger Deficit

    Merger deficit is an accounting concept used to describe the ...
  6. Net Exporter

    A net exporter is a country or territory whose value of exported ...
Related Articles
  1. Insights

    The Pros & Cons of a Trade Deficit

    Is a trade deficit, also known as a current account deficit, beneficial or detrimental to a country's economy?
  2. Insights

    Why Deficits Are Flawed Measures of Unfair Trade

    Trump’s obsession with erasing the $500B U.S. trade deficit is flawed economics, experts say.
  3. Trading

    Main Factors that Influence Exchange Rates

    The exchange rate is one of the most important determinants of a country's relative level of economic health and can impact your returns.
  4. Insights

    The Current State of the U.S. Debt

    Discover the current state of U.S. national debt, whether it's increasing or decreasing, and what is projected for the next 10 years.
  5. Insights

    What Is The Balance Of Payments?

    Learn about the balance of payments, and how it helps countries to track how much money is coming in and how much money is going out.
  6. Trading

    6 factors that influence exchange rates

    Aside from interest rates and inflation, the exchange rate is one of the most important determinants of a country's level of economic health.
  7. Trading

    3 Reasons Why Countries Devalue Their Currency

    Ever since world currencies abandoned the gold standard, many currency devaluation events have sent disruptive ripples across the globe.
  8. Investing

    OPEC Reports First Budget Deficit in 18 years

    OPEC budget swings to $99.6 billion deficit in 2015 from $238.1 billion surplus as oil plunges
  9. Insights

    The Hidden Truth Behind The U.S. Economic Recovery

    Learn how the economy is being artificially propped up by unsustainable monetary and fiscal policies.
RELATED FAQS
  1. What is the difference between a current account deficit and a trade deficit?

    Learn the meanings of the macroeconomic terms "current account deficit" and "trade deficit," and understand the differences ... Read Answer >>
  2. Which countries run the largest budget deficits?

    Discover the countries with the largest budget deficits and what it means. Deficits are influenced by the economy and also ... Read Answer >>
  3. What happens to the US dollar during a trade deficit?

    Learn what happens to the U.S. dollar during trade deficits. Trade deficits happen when imports exceed exports leading foreigners ... Read Answer >>
  4. Which U.S. presidents have run the largest budget deficits?

    Take a look at which presidents were in office for the largest budget deficits in U.S. history and how the responsibility ... Read Answer >>
  5. How long has the U.S. run fiscal deficits?

    Read about the history of deficit spending in the United States, dating back to 1789, and learn how Alexander Hamilton addressed ... Read Answer >>
Trading Center