Which situation describes a current account deficit?

Which situation describes a current account deficit?

• A. Imports exceed exports, or net income transfers out.
• B. Exports exceed imports, or net income transfers in.
• C. Net capital inflows exceed outflows.
• D. The country has a trade surplus and net income inflows.

Answer: (A)

A current account deficit happens when a country spends more on foreign goods and services and makes more payments to the rest of the world than it earns from selling goods and services and receiving income from abroad. So, if imports exceed exports, or if net income transfers out to other countries are larger than net income received, the current account balance is negative. That’s exactly what this description says. If exports exceeded imports and net income transfers were in, the current account would be in surplus, not deficit. The other options point to the capital/financial account (net capital inflows) or describe a current account surplus, not a deficit.

A current account deficit happens when a country spends more on foreign goods and services and makes more payments to the rest of the world than it earns from selling goods and services and receiving income from abroad. So, if imports exceed exports, or if net income transfers out to other countries are larger than net income received, the current account balance is negative. That’s exactly what this description says.

If exports exceeded imports and net income transfers were in, the current account would be in surplus, not deficit. The other options point to the capital/financial account (net capital inflows) or describe a current account surplus, not a deficit.