The terms current account deficit and trade deficit are often used interchangeably, but they have substantially different meanings. The current account deficit is a broader trade measure that encompasses the trade deficit along with other components.
The trade deficit is the largest component of the current account deficit and refers to a nation’s balance of trade, or the relationship between the goods and services it imports and exports. A nation has a trade deficit if the total value of goods and services it imports is greater than the total value of those it exports. If the total value of a nation’s exports exceeds the total value of imports, the nation has a trade surplus.
The current account deficit is a broader measure that includes the trade deficit and is itself part of a broader measure, the balance of payments. The balance of payments is the sum of all transactions between a nation and all of its international trading partners. In addition to the trade deficit, the current account deficit includes factor income and financial transfers.
Factor income is determined by subtracting income made by citizens of a country on their foreign investments from income earned by foreigners on their investments within the country. An example of factor income is rental profit earned by citizens of one country on property they own in another country. Financial transfers include interest earnings and foreign remittances. Foreign remittance refers to money earned in one country that is sent back to another country, as in the case of a person working outside his or her home country and sending money back home to relatives. In some cases, remittances constitute a significant portion of the gross domestic product (GDP) of the country where they are received.
(For related reading, see: Understanding the Current Account in the Balance of Payments.)