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Briefly explain how a current account deficit contributes to the pool of funds available for gross...

Briefly explain how a current account deficit contributes to the pool of funds available for gross private domestic investment. How is this related to the trade balance?

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Answer #1

current account is the one component of balance of payment and the sum of all the components of the BOP is zero. It means that current account deficit, means there is a surplus in capital account and capital inflows are coming to the country. It can be either FDI, or portfolio investments and or funds available for the investment. This capital inflow works as a fund available for the private domestic investments that is used by the firms.

It is related to the trade balance because the current account deficit is balanced by the capital account surplus and BOP becomes zero for a country.

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