Question

In a freely-floating exchange rate system, if a country is running a current
account deficit: (a) what are the consequences for the nation's balance on capital
account? (b) on its overall balance of payments?

Answer 1

The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports. The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account. The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments (BOP).