Question

) Explain why current account deficits may or may not be harmful to a country.

Answer 1

A current account deficit is nothing but a country importing more than the exports. A current account deficit is not actually bad if the nation has a flexible exchange rate system. In a flexible exchange rate system, the increased current account deficit will lead to a depreciation in the currency, at the depreciated value the exports of the nation will be more competitive and will see an increase.

Increased exports will help bring in more currency and manage to fill up the deficit and increase the income of the people in the economy.