Updated: Jan 8, 2021
We will be solving practical challenges through MBA concepts. No theory only applications !
As a management consultant, I have been involved in investment pieces with the government. Understanding basic tools of economics has come handy in building an informed view while drafting and evaluating impact of economic policies of both states and center. This article will focus on current account deficit- the concept and relevance.
Step 1: There are multiple ways of increasing economies' GDP.
3/4 ways are- increasing investments, private savings and government expenditure (discussed in Lesson 13 in detail). However things are interlinked as there might be an impact on current account deficit because of economic policies undertaken.
Step 2: Contrary to popular opinion, current account deficit is not necessarily harmful. It may be considered as a necessary trade off to grow economy of nation states. However its really important to anticipate and monitor the impact on current account deficit to avoid bankruptcy.
So what is current account deficit ?
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. It indicates a country is importing more than it is exporting.
There are 3 main methods to calculate current account which can aid us in building correlation between both economic policies and current account:
CA= (Exports-Imports) + Net Income from Abroad
CA= Gross National Product- (Private Consumption+ Investments+ Government Spending)
CA= Savings- Investments
There are detailed derivations of above equations but I believe they may not be relative to this article.
Step 3: To conclude basis above methods, the current account deficit may be caused due to-
Relatively high external investment
Relatively low private savings
Relatively high government deficit
Point number one can actually be proven with data evidence in below graph as well :)
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