Question

Should a current account deficit be a cause for alarm? Explain.

Answer 1

A current account deficit means that the value of imports for goods and services is greater than the value of exports. It can lead to the following incidents:

(i) Due to fixed exchange rate, exports will become uncompetitive.

(ii) Economic growth is not favourable.

(iii) Inflation and borrowings become major problems.

Thus we can say that current account deficit can be a cause for alarm because the value of exports increases at a slower rate than the imports and there is an increase in the deficit or we can say the surplus changes into a deficit.