Question

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

Short answer

The current account balance is lower when the trade deficit of the United States increases.

Step-by-step solution

Step 1. Definition of trade deficit.

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.

Step 2. Meaning of current account balance.

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 recieving the same amount of money it is sending.

Step 3. The impact on the current account balance.

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 recieving less income through exports but would be spending more on imports.