Which statement best describes how a current account deficit arises in Australia?

Which statement best describes how a current account deficit arises in Australia?

• A. Exports exceed imports, or net income transfers in.
• B. Imports exceed exports, or net income transfers out.
• C. If exchange rate is fixed, the current account is always balanced.
• D. Current account balance is unrelated to trade.

Answer: (B)

A current account deficit happens when a country spends more on international goods, services, and income transfers than it earns from abroad. For Australia, that means either imports of goods and services are larger than exports, or net income transfers to foreigners (such as profits, interest, and dividends paid abroad) exceed inflows. So if imports exceed exports, or Australia pays more to foreign residents than it receives, the current account shows a deficit. Keep in mind that if exports were larger than imports, the current account would show a surplus, not a deficit. The current account is closely linked to trade, and while the exchange rate regime can influence trade, a fixed exchange rate does not automatically balance the current account.

A current account deficit happens when a country spends more on international goods, services, and income transfers than it earns from abroad. For Australia, that means either imports of goods and services are larger than exports, or net income transfers to foreigners (such as profits, interest, and dividends paid abroad) exceed inflows. So if imports exceed exports, or Australia pays more to foreign residents than it receives, the current account shows a deficit.

Keep in mind that if exports were larger than imports, the current account would show a surplus, not a deficit. The current account is closely linked to trade, and while the exchange rate regime can influence trade, a fixed exchange rate does not automatically balance the current account.