A deficit in simple words refers to the shortfall and in the context of international trade, current account deficit and trade deficit are the terms used to show the country’s foreign exchange position due to imports and exports done by the country. In order to have a better understanding of both the terms, one should look at the difference between current account deficit and trade deficit –
Current Account Deficit VS Trade Deficit
Meaning
Current account deficit refers to that situation in which the value of goods as well as services imported by the country exceeds the value of goods and services exported by the country, apart from goods and services it also includes income received as well as paid in the form of interest, dividends, salaries, rent and so on. Whereas trade deficit happens only when the country’s import of goods and services exceed the country export of goods and service while other things like interest, salaries, dividends are not taken into account.
Scope
The scope of the current account deficit is wide in the sense that it not only includes exports and imports of goods but also includes other income and expenses like rent and salaries received from the outside world, interest received, interest paid, rent, and salaries paid to the outside world. Whereas the scope of trade deficit is narrow and it’s only a part of the current account deficit.
Example
An example of trade account deficit is suppose country total trade exports is $100000 and total trade imports are $120000 than country’s trade account deficit will be $20000 while an example of current account deficit is that apart from the above trade account deficit the income in the form of rent, dividends and salaries of residents from abroad is $40000 while expenses in the form of rent, dividends and salaries paid to residents of other countries is $70000 than country’s current account deficit will be $50000 which is the total of trade account deficit that is $20000 and other deficit which is $30000.
Dependence
While trade account deficit is dependent on the demand for a country’s goods and services in international markets, that is higher the demand for goods and services lower will be the trade account deficit while the current account deficit is not only dependent on demand for a country’s goods and services but also on country’s foreign assets and foreign debts. Higher foreign assets would result in higher rental and dividend income while higher foreign debts will result in higher interest payments to outside countries. In simple words, while the trade account is dependent only on one factor that is the demand and supply of goods and services while the current account deficit is dependent on many factors.
Implication
A current account deficit means that apart from trade account deficit country is making a lot of payments in the form interest, rent, dividends to the outside world which in the long term can have serious implications such as the risk of foreign investors losing confidence in the economy of the country, risk of depreciation of the currency, economy becoming uncompetitive while trade account deficit means that country is importing more and exporting less and it can be made positive only by increasing exports and ensuring that domestic industries are able to meet country’s demand so that imports decline. In simple words, it is much easier to manage trade account deficit as compared to a country having both a current account deficit as well as a trade account deficit.
As one can see from the above that current account deficit and trade deficit are not the same which many people think, and that is the reason why one should know the difference between the two in order to have a better idea about the country’s overall position as far as international trade and foreign exchange is concerned.