Describe only four (4) factors that create a current account deficit Essay

Describe only four (4) factors that create a current account deficit. Leave a space between each factor - Essay Example Deficit therefore implies that the value of the payment for the imports is greater than the receipt from the exports. The factors responsible for a current account deficit are:- Decline in domestic savings The domestic savings of a country is the path of increasing investments as in economics savings is considered to be identical to investments. If there is a continuous decline in the savings of a particular country then the scope of investment will causes an increase in the real interest rate of the country. Increase in the domestic interest rate (real) in turn attracts more foreign investment in the country as the scope of return is expected to be high. With increasing foreign investment the demand of the home currency in the foreign exchange market also increases because of the need of  Ã‚   currency conversion. This creates an upward pressure on the value of the domestic currency in comparison to the foreign currencies. Moreover, with the decrease in savings as a percentage of the total Gross Domestic Product of the country, consumption increases. Thus the demand for goods and services in the economy increases and if the domestic producers fail to meet up the increasing domestic demand of the country the import of the country increases resulting in a deficit in the current account. (Arnold).