- Current account deficit
- A current account deficit means more money leaves a country on trade, income and transfers than arrives, so the country is a net borrower from abroad.
- Current account surplus
- A current account surplus means more money arrives on trade, income and transfers than leaves, so the country is a net lender to the rest of the world.
Causes of a current account deficit
Can you name five things that push a current account towards deficit?
The first four work through what is bought and sold; the last shows the same deficit from the side of saving and investment.
More income at home brings more imports, while exports depend on incomes abroad, so a boom tends to widen a deficit.
Can you think of an example?
UK incomes grow fast while the eurozone stagnates, so UK households buy more imported cars and holidays while European orders for UK goods stay flat.
A stronger currency makes exports dearer for foreign buyers and imports cheaper at home, so exports fall and imports rise.
Can you think of an example?
The pound rises against the euro, so a German firm finds British machinery dearer and a British family finds a Spanish holiday cheaper.
A recession in the countries that buy a nation's exports cuts demand for them, whatever happens at home.
Can you think of an example?
A recession across Europe, the UK's largest market, cuts orders for British exports even though nothing has changed in the UK.
Faster inflation, slower productivity growth or weaker quality than rivals make a country's goods less attractive at home and abroad.
Can you think of an example?
UK firms fall behind on productivity and design, so buyers at home and abroad choose foreign machines even at similar prices.
When domestic investment exceeds domestic saving, including a government budget deficit, the gap must be filled by capital from abroad.
Can you think of an example?
Businesses invest heavily in new technology while households save little and the government borrows, so the extra funds come from foreign investors.