What causes a current account deficit or surplus?

A current account deficit or surplus is caused by a country's balance of trade, income from abroad, and current transfers.

A current account records a country's transactions with the rest of the world, specifically its net trade in goods and services, its net earnings on cross-border investments, and its net transfer payments. A current account surplus indicates that a nation is a net lender to the rest of the world, while a deficit shows it is a net borrower.

The balance of trade, which is the difference between the value of a country's exports and the value of its imports, is a significant factor in the current account. If a country exports more than it imports, it has a trade surplus, contributing to a current account surplus. Conversely, if a country imports more than it exports, it has a trade deficit, leading to a current account deficit.

Income from abroad also affects the current account. This includes earnings from foreign investments, interest, dividends, and remittances from citizens working abroad. If the income received from abroad is greater than the payments made to other countries, it will result in a current account surplus. On the other hand, if the payments to other countries exceed the income received, it will lead to a current account deficit.

Current transfers, such as foreign aid, pensions, and workers' remittances, also play a role. If the money sent abroad as transfers is more than the money received, it will lead to a current account deficit. Conversely, if the money received is more than the money sent abroad, it will result in a current account surplus.

In addition, macroeconomic policies, exchange rates, and economic growth rates can influence the current account. For instance, a country with a high growth rate might import more, leading to a current account deficit. Similarly, a country with a low exchange rate might export more, leading to a current account surplus. Therefore, a current account deficit or surplus is the result of various economic factors and policies.