The current account reflects the difference between a country’s savings and investments.
The three components of the current account are:
- The sum of the balance of trade (goods and services exports, less imports)
- Net income from abroad
- Net current transfers
By looking at a country’s current account, analysts are able to get a good indication of how a country is doing economically.
If the country’s current account has a surplus balance, it means the country is a net lender as it relates to the rest of the world.
Conversely, a deficit balance means the country is a net borrower.
But a current account deficit is not always a bad thing. Most often it is the result of temporary economic cycles.
For instance, a country with a surplus balance has been providing more resources to the rest of the world than it has been taking in.
The deficit balance country has been taking in more resources than it has been exporting.
In effect, the surplus balance countries have been financing the economic activities of the deficit countries.
Most likely, the deficit country government has made a decision to invest for future growth.
By taking in outside resources, and thus a deficit balance in its current account, it can use those resources for internal growth and someday become a country with a surplus current account.
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