Question

The United States has had a Current Account deficit for decades, yet the economy continues to expand. How can this be? Should a Current Account surplus be a policy objective? Do these Current Account deficit really matter?

Answer 1

Current account performance is not an indicator of the growth performance of the economy. Even though the current account of an economy is in deficit yet the country continues to expand. This is because actual growth of an economy is determined by the capital inflow and outflow from the country. If inflow of investment in the country is high, then the country will be on higher growth trajectory as compared to the country with lesser inflow of foreign investment in the country. Current account surplus is not the prime objective of the economy. However, current account deficit should be within a particular range. If it exceeds this range, then steps should be taken to control the deficit in the current account. Current account deficits matter if it exceeds a particular range. Small amount of the deficit does not lead to any hindrance in the growth of the economy.