Current account deficits arise primarily when the balance of trade is negative, that is the country is importing more than it is exporting. Also included in the current account are official transfers such as foreign aid, private transfers and so-called invisible trade (services, intellectual property, dividends and interest).

Globalization through freer trade increases the volume of trade and competition between countries. A country achieving a lower cost of production will be more competitive in translating factor endownments into goods and services for export, so fiscal policy and trade opportunities will have an impact on its balance of trade over the long term. In the short term, exchange rates have an influence on the price and competitivenss of imports and exports. Where a currency is over-valued against trading partners, exports are more expensive and the trading partners imports are less expensive.

Current account deficits can be manageable even over a longer term and this depends on the size of the deficit against the national income of the country. Cheaper imports can mean greater savings too. The bottom line for a country is its balance of payments, which is the current account taken together with the capital account which is an outcome of capital flows. Therefore the current account deficit must be financed with a favourable balance of capital flows. Now, foreign capital investment abroad means more money going out so this needs to be balance by capital flows coming in, so it can be balanced by if domestic assets are sold to foreign holdigns or if more domestic savings are held in assets at home. Where the balance is still negative, the country may finance the deficit by borrowing from foreign surplus savings. Financial globalization has increased the availability of such savings but it means servicing those debts. The United States is in a position of having to borrow to finance its large current account deficit, but national income remains strong enough to sustain it for the time being, and less foreign capital investment has taken place than might be expected with financial globalization and the United States has been able to hold on to domestic assets reasonably well.

The question may be raised as to whether current account deficits have been significant in the context of the Asian and Argentinian crises where capital market liberalization was joined with fixed exchange rates. With Argentina, the fixed exchange rate became problematic to the current account when the U.S. dollar was overvalued and exports fell. However, when the U.S. dollar was de-valued, Argentina benefited. Productivity was the chief problem for Argentina, and national income could not justify the level of public spending tranlating into borrowing and low national savings. The mismanagement of monetary policy and hyperinflation created successive problems with the currency further contributing to stagnation and political problems. Productivity was mainly linked with poor fiscal policy and rigid labour markets over the long-term. The issue was likely the ratio of current account deficit to national income, and public spending could not be justified against the productivity of the nation. Crony capitalism and a vulnerable banking sector with the expectation of bail-out, along with politically motivated public spending meant unproductive investment of capital. It meant borrowing to finance the deficit and large foreign debt that had to be serviced and political unrest. Finally, the fixed currency could not be defended and Argentina defaulted on its debt. With the Asian countries, the current account deficit was significant in Thailand and the de-valuation of the bhat which had been promised as a fixed currency leading to the flight of capital without capital controls. These countries all had weak banking sectors, liberalized capital markets and fixed currencies, and it was the contagion from the panic in Thailand, not necessarily their current account deficits as they were in the other nations, that caused massive capital outflow and then currency crises there. The current account deficits to that point had been manageable in the other countries given the boom of investment.

Current account deficit is therefore not necessarily a bad thing when considered apart from other contextual factors. It requirese financing which requires a balance of income, investment and borrowing, so current account deficits are bad if the cause is an unproductive economy and they create more vulnerability in the context of capital flight in liberalized markets and a weak banking sector, particularly where a fixed currency comes under pressure.