Current Account Deficit or CAD is the shortfall between the money flowing in on exports, and the money flowing out on imports. Current Account Deficit (or Surplus) measures the gap between the money received into and sent out of the country on the trade of goods and services and also the transfer of money from domestically-owned factors of production abroad. To understand CAD in detail, it is essential to learn about the Current Account. A nation’s Current Account maintains a record of the country’s transactions with other nations, in terms of trade of goods and services, net earnings on overseas investments and net transfer of payments over a period of time, such as remittances. This account goes into a deficit when money sent outward exceeds that coming inward.
Current Account Deficit is slightly different from Balance of Trade, which measures only the gap in earnings and expenditure on exports and imports of goods and services. Whereas, the current account also factors in the payments from domestic capital deployed overseas. For example, rental income from an Indian owning a house in the UK would be computed in Current Account, but not in Balance of Trade.
According to the Bureau of Economic Analysis, there are four components of the current account. The largest is trade in goods and services. The other three are much smaller. Net income is earned by residents by overseas investments or work. Second are direct remittances from workers to their home country, foreign aid, and foreign direct investments. The third is increases or decreases in assets like banks deposits, securities, and real estate.
The largest component of a current account deficit is the trade deficit. That’s when the country imports more goods and services than it exports. The current U.S. trade deficit reveals that the United States imports a lot more than it exports. Many think that America is becoming less competitive in the global market.
The second largest component is a deficit in net income. That occurs when foreigners earn more from the country than residents earn on foreign work and investments.
The other two components, direct remittances, and investment income aren’t large enough to materially affect the current account deficit