Question

Explain the concept of 'deficit' in the balance of payments.

What do you mean by deficit in the balance of payments?

Answer 1

The current and capital accounts are the two parts of the BOP. A current account deficit occurs when the amount of goods and services exported is less than the amount of goods and services imported. On the other hand, if there is a net capital outflow from the nation, the capital account will display a deficit. Therefore, if a country's imports exceed its exports and its capital outflow exceeds its capital inflow, we may say that its BOP will be in deficit.