Current Account Deficit

Current Account Deficit Meaning

Current Account Deficit is a situation where a country’s total value of products and services imported goes beyond the value of products and services it exports. In general, a it is a result of high spending on imports compared to income from exports.

Current Account Deficit Formula

Current Account Deficit formula is represented as below,

Current Account Deficit = (X – M) + (I – E) + NT


  • X = Value of Exports
  • M = Value of Imports
  • I = Income from foreign sources
  • E =Expenses on foreign sources
  • NT = Net transfers by government

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For eg:
Source: Current Account Deficit (

Elements of Current Account Deficit

Elements of Current Account Deficit

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#1 – Trade Deficit

Goods and services which country trade with other countries is the largest component in every economy, therefore if the country has a high level of imports compare to its Exports value resulting in the trade deficitTrade DeficitWhen the total sum of goods or services that a country imports from other countries is higher than the total sum of goods or services that a country exports to other countries, this is referred to as a trade deficit, which is the opposite of the balance of trade more.

#2 – Net Income

There are two sources of income received by people in a country. I.e.

#3 – Direct Transfers

Country residents who work outside send part of their income to the home country, as well as foreign aid spent or received by the county and Foreign Direct Investment in the country’s business and industries, reflects in the Current account deficit.

#4 – Income from Assets

Increase or decrease in government and central bank reservesBank ReservesBank reserve is the minimum fund limit the commercial banks and other financial institutions have to maintain as per the central bank's guidelines. Each bank preserves such funds either with the large banks or Federal Reserve Bank facility; or in a vault more, real estates, bank deposits. Assets owned by foreign individuals and business are subtracted from this income includes

  • Deposits in banks of the country from foreign individuals, business.
  • The loan provided to domestic banks from foreign banks.
  • Investments in Government securities from foreign individuals.
  • Security sold to foreigners from domestic businesses.


Below is the example to calculate Current Account Deficit

Current Account Deficit Example
  • =50+60+(-265)
  • =-155

Therefore, the Current Account Deficit at the US $ 155 Bn.

Effects of Current Account Deficit on Country

  • Up to a certain limit, the Current account deficit is not considered as dangerous but in fact helpful since it helps countries’ economies in growth in business and infrastructure.
  • In the long run, it may affect the country negatively in terms of economic growth since many businesses operating in-country prefer to outsource jobs because of cheaper labor available in other countries compare to domestic countries. E.g. U.S. companies outsource jobs for their various backend process.
  • Reduction in domestic currency value and reduce confidence in assets of countries, which reduces demands in terms of business as well.
  • Affect the standard of living of residents.
  • Reduction of public expenditure.
  • The overall effect on the country and the world economy.

Practical Examples

#1 – Greek Debt Crisis

#2 – Measurements

  • Increase in Exports Value: Compare to import country can create new products and services to increase exports or modifications in export prices to manage the level of income from exports.
  • Restriction on Imports: Tariffs, Quotas can be implied on products imported in-country to limit imports.
  • Policies in favor of Exports: The government can provide benefits to business and industry for an increase in exports like tax benefits, one window for documentation and process.
  • Currency Valuation: in case of major changes in policy, government to reduce export cost, Currency Devaluation might be one of the last options.


Current Account deficit although it implies a country’s income less than its spending, is not necessary a disadvantageous for the country since many developing countries need continuous investment and resources in infrastructure, business, and industries for growth, which eventually generates income and employment opportunity to residents over a period. In case a continuous rise in negative current account balance compare to the country’s economy, the government needs to take immediate measures before the situation goes out of control affecting social, the financial status of the country and standard of living of residents of the country.

Recommended Articles

This has been a guide to Current Account Deficit and it’s Meaning. Here we discuss an example of current account deficit, the balance of payments of the country along with its formula, effects, and elements. You can learn more about from the following articles –

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