Is the current account deficit an issue?
No: If a current account deficit is financed from long term capital inflows then this can increase the economys productive capacity leading to economic growth. If the deficit gets too large it will cause a devaluation which will reduce the deficit. Yes: There could be problems financing the deficit in the long term. Interest rates will need to rise in order to attract foreigners to buy our financial assets, as this will act as an export and replenish the debt. But these high interest rates will reduce domestic demand. A large current account deficit is often a sign of an unbalanced economy. It could be a sign of structural weakness in that our residents are forced to import goods in order to satisfy their desires. Over time the deficit will increase due to interest payments on the debt. This means that in the future the economy will need to attract capital flows just to pay off the interest payments. What affects imports/exports and the balance of payments? The quality of the products.
