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Factors That Create a Current Account Deficit

In: Business and Management

Submitted By nicole1122
Words 567
Pages 3
The current-account balance is a report that covers a certain period; regularly a year, which indicates the difference between the inflow and outflow of money into and out of a country from the trade in goods and services, investment, saving, and income and cash transfers. When a country’s current account balance is positive (running a surplus), the country is a net lender to the rest of the world. When a country’s current account balance is negative (running a deficit), the country is a net borrower from the rest of the world. Therefore, the current-account balance is a way to determine its economic activity and can strongly reflect a country’s overall economic position.
Ideally speaking, the current account balance should be zero, in the real world however this is highly improbable.
The formula used for calculating the current account balance is CAB = X-M+NY+NCT. Where X = Exports of goods and services, M = Imports of goods and services, NY = Net income abroad and NCT = Net current transfers.
It is important to understand from where a deficit or a surplus is stemming because sometimes looking at the current account as a whole could be misleading.
In the United States, for example, current account deficit has been increasing steadily for several years now. Among the factors that have created a current account deficit, four of these are described as follows:

1) Consumer spending had been on the rise in the United States, motivated in great part to a growing real estate market. Expendable income in the hands of consumers and the rapid move for globalized production brought about a large influx of exports with a disproportionate sale of domestic products. This plus added low interest rates, tax cuts for the wealthy, and a high tendency to import (luxury commodities such as stereos and cars) produced a rapidly advancing current account deficit.

2) Low labor

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