What Is an Account Deficit Problem?

In today's global economy, most countries rely heavily upon international trade to gain access to raw materials and goods that they do not have in abundance or cannot produce efficiently. International trade results in the potential for trade deficits, which occur when a country spends more money on imports than it receives by selling exports. A current account deficit is a type of financial deficit that results from international trade, which can potentially lead to a variety of economic problems.

Current Account Deficit Basics

Current account is a term frequently used in economics when discussing international trade, which is equal to a country's exports minus its imports plus its net unilateral transfers. Net unilateral transfers are gifts of money where nothing is expected in return, such as international aid and grants. If the current account is negative, there is a current account deficit. If a country imports more than it exports, it is likely to have a current account deficit.

Problems with a Deficit

Economists disagree as to whether a current account deficit is a problem in and of itself, but many agree that a large and prolonged deficit can lead to negative economic consequences. When a country has a current account deficit, it spends more than it takes in from other countries. This means it must borrow money from other countries to make up the difference. Excessive borrowing can lead to high levels of national debt, which can become a burden on the economy. Some economists believe that large and prolonged deficits can lead to a slowing of economic growth and higher unemployment.

Causes of Deficits

Current account deficits can arise due to several contributing factors. Anything that tends to make people increase imports or decrease exports can lead to a larger deficit. Factors that can result in a deficit include high demand for foreign goods, declining foreign demand for domestic goods and low private savings rates. The United States is a wealthy country, and its people tend to spend the money that they make rather than save it. In turn, this tends to increase the demand for imports and causes a current account deficit.

Considerations

The United States has maintained higher exports than imports for more than 20 years. According to the U.S. Census Bureau, the international trade deficit in goods and services was $43.5 billion in October 2011, down from $44.2 billion in September. The recession that began in the late 2000s led to a reduction of the U.S. trade deficit because during a recession, people have less income to spend on imports.

References

• The Free Dictionary: Balance of Trade
• Bureau of Economic Analysis: Glossary
• Federal Reserve Bank of San Francisco:
• U.S. Federal Reserve Board: U.S. Current Account Deficit: Causes and Consequences
• U.S. Census Bureau: Goods and Services Deficit Decreases in October 2011
• Bureau of Economic Analysis: News Release: U.S. International Transactions