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Commodities Views News. Forex Forex News. Appendix 3 - Relationship between the current account deficit and foreign liabilities[]. The Valuation Effect A current account deficit in a given period is equal to the change in net foreign liabilities i.
Effect of Revisions on the Size of the Current Account Deficit The monthly balance of payments estimates are often subject to considerable revision. Revisions may occur for a number of reasons, including: revisions to estimates provided by a data source; estimates from a more timely but less accurate data source are replaced by estimates from a different, less timely but more accurate data source; improvements in the method of compiling the balance of payments estimates from the data source; and changes in the concepts underlying the estimates.
Committees Committees. Net foreign debt at beginning of period. Net foreign equity at beginning of period. Develop and improve products. List of Partners vendors.
The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account. A country can reduce its existing debt by increasing the value of its exports relative to the value of imports. It can place restrictions on imports, such as tariffs or quotas, or it can emphasize policies that promote export, such as import substitution, industrialization, or policies that improve domestic companies' global competitiveness.
While an existing deficit can imply that a country is spending beyond its means, having a current account deficit is not inherently disadvantageous. If a country uses external debt to finance investments that have higher returns than the interest rate on the debt, the country can remain solvent while running a current account deficit. If a country is unlikely to cover current debt levels with future revenue streams, however, it may become insolvent.
A current account deficit represents negative net sales abroad. Developed countries, such as the United States, often run deficits while emerging economies often run current account surpluses. Impoverished countries tend to run current account debt. Fluctuations in a country's current account are largely dependent on market forces.
Even countries that purposefully run deficits have volatility in the deficit. The United Kingdom, for example, saw a decrease in its existing deficit after the Brexit vote results in The United Kingdom has traditionally run a deficit because it is a country that uses high levels of debt to finance excessive imports. A large portion of the country's exports are commodities, and declining commodity prices have resulted in lower earnings for domestic companies. This reduction translates to less income flowing back into the United Kingdom, increasing its current account deficit.
However, after the British pound declined in value as a result of the Brexit vote that was held on June 23, , the weaker pound decreased the nation's existing debt. This decrease occurred because overseas dollar earnings were higher for domestic commodity companies, resulting in more cash inflows to the country. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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