Current Account Deficit – Causes & Indicators
International trade and payments are recorded in the Balance of Payments (BoP). An important concept is Current Account Deficit (CAD).
1. Meaning of Current Account and CAD
- Current Account records:
- Exports and imports of goods and services.
- Income (interest, profit, dividend).
- Current transfers (remittances, gifts, grants).
Current Account Deficit (CAD) occurs when total outflows on current account exceed total inflows during a period.
Simple View
CAD means a country is importing more goods, services and income than it is exporting, on net basis.
2. Causes of Current Account Deficit
- High import demand (oil, gold, machinery).
- Slow growth of exports.
- Adverse movement in terms of trade.
- High income outflows (profit, interest to foreign investors).
- Global economic slowdown.
3. Indicators to Watch
- CAD as % of GDP – key sustainability indicator.
- Foreign exchange reserves – higher reserves give safety.
- Exchange rate movements – persistent CAD may weaken currency.
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(Exact safe levels vary; students should quote exam-relevant numbers from textbook or latest reports.)
4. Why CAD Matters for Business
- Affects exchange rate, which influences import cost and export competitiveness.
- May lead to policy changes (tariffs, export incentives).
- Impacts interest rates and capital flows.
5. Quick Revision Points
- CAD = current account payments > receipts.
- Watch CAD % of GDP and forex reserves.
- High, persistent CAD can create external vulnerability.
6. Quiz Time 🎯
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