Question

"Trade Deficit must exist, if a country is facing situation of Current Account Deficit (CAD)." Defend or refute the above mentioned statement with valid arguments.

Hint:

Current Account Deficit includes trade in goods, services, and income, whereas Trade Deficit only refers to the goods trade.

Answer 1

The statement is refuted. 
- A Current Account Deficit (CAD) occurs when the total value of a country's imports of goods, services, and transfers exceeds the value of its exports. However, it does not necessarily imply that there is a trade deficit.
- A trade deficit specifically refers to a situation where the value of imports of goods exceeds the value of exports of goods. 
- It is possible for a country to have a CAD but not a trade deficit, especially if the country is earning more income from its services or from foreign investments, which can offset a goods trade deficit. 
- For instance, a country may have a surplus in services and income transfers, leading to a CAD without having a trade deficit. 
Conclusion: Therefore, a CAD does not automatically imply the existence of a trade deficit, as the current account includes services, income, and transfers, not just trade in goods.