Current Account deficit A record of the dealings made between a nation and the rest of the world during a particular time period is called the Balance of Payment (BoP) of that country for that year. The transaction includes both exports and imports of both visible and invisible goods and export and import of financial assets…
Deficit therefore implies that the value of the payment for the imports is greater than the receipt from the exports. The factors responsible for a current account deficit are:- Decline in domestic savings The domestic savings of a country is the path of increasing investments as in economics savings is considered to be identical to investments. If there is a continuous decline in the savings of a particular country then the scope of investment will causes an increase in the real interest rate of the country. Increase in the domestic interest rate (real) in turn attracts more foreign investment in the country as the scope of return is expected to be high. With increasing foreign investment the demand of the home currency in the foreign exchange market also increases because of the need of currency conversion. This creates an upward pressure on the value of the domestic currency in comparison to the foreign currencies. Moreover, with the decrease in savings as a percentage of the total Gross Domestic Product of the country, consumption increases. Thus the demand for goods and services in the economy increases and if the domestic producers fail to meet up the increasing domestic demand of the country the import of the country increases resulting in a deficit in the current account. (Arnold). ...
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Simply put, Net Foreign Asset is the total current value of its offshore asset less the current value of other countries’ asset within its borders. And, Current Account is the sum of Balance of Trade, net Factor Income and net Transfer Payments. Balance of Trade, in the meantime, is the total current value of exported goods and service less the total value of imported goods and services.
While the current account surplus increases a country's net foreign assets, a current account deficit does the reverse. It is evident from the above definitions that huge amounts of current account deficit may not be good for the economic growth. Current account deficits occurs when a country’s imports exceeds the exports.
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