Question

If the trade deficit of the United States increases, how is the current account balance affected?

Short answer

Current account balance falls.

Step-by-step solution

Step1. Introduction

When the country's import exceeds its export, there is a trade deficit in the country. It is calculated by subtracting the value of the exported goods from the value of the imported goods.

The current account of a nation shows the value of trade in goods and services along with the flow of income and aid. Balance in current account means that the nation is receiving the same amount of money it is sending.

Step2. Explanation

Since, the trade acocunt or trade and goods and services is a component of current account, a trade deficit would mean that the value of current account balance would decline. The country would be receiving less income through exports but would be spending more on imports.