Question

Explain the relationship between a current account deficit or surplus and the flow of funds.

Short answer

In the case of cash outflow, the current account will be more negative or it will be less positive and vice versa in the case of cash inflow.

Step-by-step solution

Step 1. Current account deficit

The current account deficit is the difference between the value of imported goods and services and the value of exported goods and services in a country's trade.

Step 2. Flow of funds

Fund flow is the sum of all cash inflows and outflows from and into various financial assets.

Step 3. Explanation

The current account will become more negative or less positive as more money flows out of the country (for example, to pay for imports), and the current account will become less negative or more positive if more money flows in.