Yesterday, I rather unsuccessfully tried to explain the significance and meaning of Current Account Deficit to a wannabe MBA. Took quite a lot time, to make things clear about Current Account Deficit and Capital Account.
So, here I present a simpler version, the very basics of Current Account Deficit for non-eco. background people like me.
C.A.D. simplified -
For importing things / goods, you need to pay in foreign currency ( say dollars). You get this dollars by the things which you have exported. In case there is a shortfall, you need to take a debt from out of the country in dollars.( that is you have to take a external debt). Also you can use some portion of your forex reserves. The condition in which there is such a shortfall is called Current Account Deficiet.
So, here I present a simpler version, the very basics of Current Account Deficit for non-eco. background people like me.
C.A.D. simplified -
For importing things / goods, you need to pay in foreign currency ( say dollars). You get this dollars by the things which you have exported. In case there is a shortfall, you need to take a debt from out of the country in dollars.( that is you have to take a external debt). Also you can use some portion of your forex reserves. The condition in which there is such a shortfall is called Current Account Deficiet.
Some economists believe that a current account surplus is not good, as the surplus dollars will have to be invested in low yielding US bonds / treasury. A little CAD is good, as it would be possible to borrow money at low interest rate and use it in high yielding investments in a booming economy such as us. However, a high CAD would lead depreciation in currency, and overall outlook on the economy will become weak.
India’s CAD howers around currently 2-3 % of GDP since last three years.
1 comment:
Thanks for writing this.
Post a Comment