What is the meaning of current account deficit?
The current account is in deficit when the aggregate decisions of households, firms and governments spend more than what is produced in the nation domestically. It can be shown that the current account deficit is equivalent to public sector balance plus private sector saving-investment gap. Let Y be domestic production (national output), C is household consumption expenditure, I is private investment, G is government expenditure on goods and services, X is exports and M is imports. The expenditure approach to compute national income tells us that Y = C + I + G + X – M. It is also true that Y = C + S + T + F where S is private savings, T is net taxes (taxes less transfers) and S is servicing of foreign-owned capital. Thus it can be shown that: (I – S) + (G – T) = (M + F) – X The right hand side of the equation essentially represents the magnitude of current account deficit with the assumption that unilateral transfers are negligible. The above equation simply says that the current accou
