I read this article and still don't understand the difference. "Spends more money on what it imports compared to the money it receives for what it exports" (how it defines current account deficit). "There is more being bought by the country than there is being sold" (how it defines trade deficit). Isn't this the same thing described by different words?
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asked Mar 30, 2020 at 10:46
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1$\begingroup$ Some good answers below, but you could also look at gregmankiw.blogspot.com/2006/07/… for some concrete examples; it would be lame for me to quote that here in its entirety. $\endgroup$– FizzMar 31, 2020 at 2:55
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2 Answers
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They are very related concepts but they are not completely same.
Current account deficit occurs when country spends more on imports than it receives in imports.
Trade deficit means that more imports are being sold than exports by a country.
A trade deficit is also a part of current account deficit as current account can be decomposed as:
$$CA=X-M+NI+NT$$
Where $X-M$ is the trade balance and and if $X-M<0$ we say country has a trade deficit, but as you can see the current account also includes net income which is income of country’s resident minus income paid to foreigners and NT is net transfers which includes things like foreign aid and remittances. A current account deficit occurs when $X-M+NI+NT<0$.
So although they are related and trade deficit is usually a big component of current account deficit they are definitely not same. It’s even possible for country to have current account surplus while having trade deficit.
answered Mar 30, 2020 at 11:38
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$\begingroup$ Should one ring the alarm if current account is negative? The US has a trade deficit with many countries and there's no catastrophe $\endgroup$ Mar 30, 2020 at 12:38
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1$\begingroup$ @SergeyZolotarev no if a country has flexible exchange rate neither current account surpluses or deficits are a problem. Under some specific exchange rate restrictions or trade policies either trade surplus or trade deficit becomes a problem but that does not really apply to US which is more or less still free trading country (this mostly creates issues for members of Euro Zone). In the long run what you want is perfect trade balance but floating exchange rate will help to deliver that in long run. If you don’t have it then both CA or trade surpluses and deficits are bad for economy. $\endgroup$– 1muflon1 ♦Mar 30, 2020 at 12:43
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To complement @1muflon1's answer (+1). Here are some definitions from the Deardorffs' Glossary of International Economics, a very reliable source of information.
- Trade deficit is simply defined as "Imports minus exports of goods and services."
- Regarding current account deficit.
Let's first define the current account which includes trade:
A country's international transactions arising from current flows (...). Includes trade in goods and services (including payments of interest and dividends on capital) plus inflows and outflows of transfers.
- Current account deficit is thus credits minus debits on current account (and this balance is negative).
In other words the current account balance equals the balance of trade on goods and services, including interest and dividend income, plus net inflows of transfer payments.
answered Mar 30, 2020 at 12:36