Current Account Deficit

James F. Smith

The current account deficit is broader than the generally well-known trade deficit because it includes the deficit (or surplus) on investments and both personal (think foreigners sending money home) and government (think foreign aid or military assistance) transfer payments. A current account is the difference between exports and imports plus the difference between interest and dividends received from foreigners or paid to foreigners plus the difference in transfer payments paid or received. It is a current account deficit when the total amount of money leaving a country across these three categories exceeds the amount coming in; most commonly this occurs when imports exceed exports. The current account deficit and the federal budget deficit are often erroneously linked in discussions of the “twin deficits.” As Figure 1 shows, the United States has experienced a current account deficit for all but one quarter (the first quarter of 1991) over the past The ...

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