Question 1

Is a current account deficit always a sign of a failing economy?

Accepted Answer

Not necessarily. A deficit can be a sign of a strong, growing economy where consumers have high incomes and a strong demand for imported goods. It can also be sustained if the country is attracting significant foreign investment (a financial account surplus). However, a large, persistent deficit that is difficult to finance can become a serious problem, potentially leading to currency depreciation and a build-up of foreign debt.

Question 2

If the balance of trade is in deficit, does that mean the current account must also be in deficit?

Accepted Answer

No. While the balance of trade is the largest component, it is possible for a country to have a trade deficit but still run a current account surplus. This would happen if the country has a sufficiently large surplus on its primary income account (e.g., from profits on extensive overseas investments) and/or its secondary income account that outweighs the deficit on the trade balance.

Question 3

If the current account is in deficit, does this mean the overall balance of payments is unbalanced?

Accepted Answer

No, the overall balance of payments must, by definition, always balance to zero. A current account deficit must be matched by an equal and opposite surplus on the combined capital and financial accounts. This surplus shows how the current account deficit is financed – for example, through foreign direct investment or borrowing from abroad. It signifies that the country is a net borrower from the rest of the world.

Current account of the balance of payments

What you need to know

Recording international flows