A current account measures trade, international income, direct transfers of capital, and investment income. A current account deficit occurs when a country imports more goods, services, and capital than it exports. It creates a reliance on foreign parties for capital. A current account deficit isn’t necessarily something to be avoided – it can be a sign of economic growth, or a sign that the country is a credit risk. There are multiple components of a current account deficit that should be taken into account when assessing each case.
The main component is trade deficit. A country experiences a trade deficit when it imports more goods and services than it exports. The next most important component is a net income deficit. This occurs when foreign investments exceed resident investments and savings. Third is net income, or the dollar value of payments made to foreigners working in another country (including wages, interest payments, and domestic stock dividends). The final component is direct transfers, which includes government grants/aid to foreign residents as well as capital which foreigners return to their home country.
Ultimately whether a current account deficit has a positive or negative impact is primarily based on the length of time that a country experiences it. In the short term, a current account deficit is advantageous, as countries are receiving more capital than they could generate on their own, thus driving economic growth. The issue occurs in the long term, when it is possible that foreign investors will withdraw their funds. This would lower the value of the national currency and in response lower the value of the country’s assets in foreign marke...
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... human rights protection programs, cultural factors, and other social institutions – so closely tied that it is not possible to statistically differentiate between the open trade’s effect on growth and the economic growth’s effect on the related institutions. An economy entrenched in international trade may grow faster because it trades more, but it could also be the case that institutional and state policies are the stimulus of greater economic growth which also facilitate international trade.
To date, the empirical evidence has not determined that one begets the other. The Heckscher-Ohlin Model, which is frequently used to support international trade, shows that there are large costs associated with the growth of international trade which can reallocate resources to different sectors of the economy, potentially leading some sectors to collapse or become obsolete.
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