Functions of the international monetary system

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CURRENT ACCOUNT DEFICIT

First of all we should know what is BALANCE OF PAYMENT. It MAY BE DEFINED AS SYSTEMATIC RECORD OF ALL ECONOMIC TRANSACTIONS BETWEEN A RESIDENT OF THE COUNTRY AND THE REST OF THE WORLD DURING THE GIVEN PERIOD. Thus the Balance of Payments 'BOP' is an account of all transactions between one country and all other countries--transactions that are measured in terms of receipts and payments. From the U.S. perspective, a receipt represents any dollars flowing into the country or any transaction that require the exchange of foreign currency into dollars. A payment represents dollars flowing out of the country or any transaction that requires the conversion of dollars into some other currency. The three main components of the Balance of Payments are:

1. The Current Account including Merchandise (Exports Imports), Investment income (rents, profits, interest)
2. The Capital Account measuring Foreign investment in the U.S. and U.S.investment abroad, and
3. The Balancing Account allowing for changes in official reserve assets (SDR's, Gold, other payments)

Meaning of Current account deficit
Thus when imports are more than exports in current account then there is current account deficit.

Earlier the federal government budget was in surplus, which has been transformed into a yawning deficit, which will persist as far as the eye can see. At the same time, the current account deficit has reached levels, which have portended currency collapse in virtually every other instance in history. The reasons for current account deficit are;

1. Alarming Financial Deterioration in the US:

In the space of two years, the federal government budget surplus has been transformed into a yawning deficit, which will persist as far as the eye can see. At the same time, the current account deficit has reached levels which have portended currency collapse in virtually every other instance in history. The United States is now borrowing about $540 billion per year from the rest of the world to pay for the overall deficit funding ...