Introduction
Current account deficit or CAD is the difference between the money coming in due to exports and the money going out due to imports. Current account deficit (or surplus) calculates the difference between the money obtained and sent from the country on the trade of goods and services as well as the movement of capital from domestic production factors abroad.
The CAD of a nation maintains a record of the country's transactions with other nations in terms of trade in goods and services, net profits on foreign investments, and net transfer of payments over time (remittances). This current account goes into a deficit when money sent out exceeds that coming inward.
CAD & BoT
Current Account Deficit (CAD) varies slightly from the Balance of Trade(BoT), which only calculates the revenue deficit and spending on exports and imports of goods and services. Whereas, the current account also considers the payments from domestic capital deployed in other countries.
For instance, If an Indian receives rental income from his property in UK, it will be measured in Current Account but not in Balance of Trade.
How to Calculate?
The current account is net profits, interest and dividends, as well as payments, such as international assistance, remittances, and donations. The percentage of GDP is calculated as:
*Trade Gap = Exports – Imports Current Account = Trade Gap + Net Current Transfers + Net Foreign Income *
A country with increasing CAD shows it has become uncompetitive, and investors are reluctant to invest there. They may withdraw their investments.
Impact of CAD
Current account deficit for an economy may be a positive or negative measure, depending on whether it runs a deficit. Foreign capital is seen being used in many economies to fund investments. Current account deficit may benefit a debtor nation in the short run, but it may be troubling in the long run as investors start to raise questions about an adequate return on their investments.
