Current Account Deficit Consequences

• Current account deficit


  A situation where a country's imports exceed its exports
• A country has a current account deficit

  It could lower aggregate demand in the economy
• Reduction in aggregate demand

  Leads to lower growth and higher unemployment in the economy
• A country has a current account deficit


  It often finances it by running financial account surpluses
• Financing a current account deficit

  Issuing more debt, such as selling government bonds, corporate bonds, or company shares to borrow from the rest of the world
• Accumulating large amounts of debt to finance a current account deficit

  Investors may lose confidence in the country's ability to pay back the debt
• Investors lose confidence in a country's ability to pay back its debt


  They may start to pull away from buying the country's debt
• Investors pulling away from buying a country's debt


  Leads to a currency crisis as the country struggles to finance its current account deficit
• A country has a current account deficit

  It puts downward pressure on the exchange rate of its currency
• A weaker exchange rate


  May not effectively correct a current account deficit, especially for countries without a strong exporting base
• A small current account deficit as a proportion of GDP is not as much of an issue to finance through debt, but a large deficit becomes problematic