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Monday, December 5, 2011

What is Current Account Deficit?

When a country imports more goods and services than the same it exports, is called current account deficit.
India exports IT solutions and services, textiles, gems and jewelleries, pharmaceutical products, leather items, chemicals etc., while it primarily imports crude oil, tools & machinery, chemicals etc.

In simple words, Current Account Deficit (CAD) is the difference in the monetary value of what a country imports and what it exports, and it is better called as ‘Balance of Payment’(BOP).

CAD shows how much money is flowing out of the nation.
When CAD is negative i.e. a country exports more (in value) than what it imports, it is called Current Account Surplus.

When we talk specifically, CAD is the sum of Balance Of Payments of-
(1)    Trade in Goods (Tangible Items)
(2)    Trade in Services (Financial Services, IT Services and Consultancy Services Etc.)
(3)    Investment Incomes
(4)    Foreign Aid

Trade deficit is often synonymously used for the CAD but is little different.
While reckoning Trade Deficit, BOP of investment income and foreign aid are not considered.
So Trade Deficit is the sum of balance of payments of goods and services only.


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