Question

Occasionally, a country will have a Current Account deficit and at the same time a Capital Account deficit. Explain how this can happen.

Answer 1

Both Current and Capital Accounts are the part of the Balance of Payments.

A deficit in the current account means that the country's exports less than its imports. On the other hand, capital account shows the capital inflow and outflow from/to the country.

When there is a deficit in the current account, the economy starts borrowing at a higher pace to keep the balance in the current account. Such high level of borrowing sometimes lead to currency outflow as the nation has to rely on the imports from other countries. As a result, the capital outflows outweighs the capital inflow and the deficit can be seen in capital account.

Hence, it is possible that both the accounts have the deficit simultaneously.