<P> C A = (X − M) + N Y + N C T (\ displaystyle CA = (X-M) + NY + NCT) </P> <P> Where CA is the current account, X and M are respectively the export and import of goods and services, NY the net income from abroad, and NCT the net current transfers . </P> <P> A nation's current account balance is influenced by numerous factors--its trade policies, exchange rate, competitiveness, forex reserves, inflation rate and others . Since the trade balance (exports minus imports) is generally the biggest determinant of the current account surplus or deficit, the current account balance often displays a cyclical trend . During a strong economic expansion, import volumes typically surge; if exports are unable to grow at the same rate, the current account deficit will widen . Conversely, during a recession, the current account deficit will shrink if imports decline and exports increase to stronger economies . The currency exchange rate exerts a significant influence on the trade balance, and by extension, on the current account . An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit (or narrowing the surplus). An undervalued currency, on the other hand, boosts exports and makes imports more expensive, thus increasing the current account surplus (or narrowing the deficit). Nations with chronic current account deficits often come under increased investor scrutiny during periods of heightened uncertainty . The currencies of such nations often come under speculative attack during such times . This creates a vicious circle where precious foreign exchange reserves are depleted to support the domestic currency, and this forex reserve depletion--combined with a deteriorating trade balance--puts further pressure on the currency . Embattled nations are often forced to take stringent measures to support the currency, such as raising interest rates and curbing currency outflows . </P> <P> Action to reduce a substantial current account deficit usually involves increasing exports (goods going out of a country and entering abroad countries) or decreasing imports (goods coming from a foreign country into a country). Firstly, this is generally accomplished directly through import restrictions, quotas, or duties (though these may indirectly limit exports as well), or by promoting exports (through subsidies, custom duty exemptions etc .). Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly increase the balance of payments . Also, Currency wars, a phenomenon evident in post recessionary markets is a protectionist policy, whereby countries devalue their currencies to ensure export competitiveness . Secondly, adjusting government spending to favor domestic suppliers is also effective . </P>

A deficit in a country's current account means that
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