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Economics explained


Balance of payments

Consequences of a current account deficit

Consequences of a current account deficit

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A country living beyond its means

A current account deficit allows the residents of a country to consume more products than the country produces. This is sometimes referred to as a country living beyond its means.

Slows down economic growth

A trade deficit means the economy is spending more money on imports than it receives from the export of goods and services. This can cause aggregate demand in the economy to fall, which may slow down economic growth. As the demand for labour is a derived demand, a fall in aggregate demand is likely to cause unemployment in the economy.

Indication of an uncompetitive economy

In general, large and persistent current account deficits are a sign that the country is internationally uncompetitive, which has more severe consequences for the domestic economy.

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