How current account deficit increases foreign ownership

If a country runs a current account deficit, it means that the country is importing more than it is exporting. There will then a surplus on the financial / capital account, increasing foreign claim on the country’s assets.

For example, a current account deficit could be financed by foreign multinational investment or asset purchases, so in your example, there will be a build-up of the developed market’s country assets held by the emerging market.

This is exemplified in real-life by countries such as the United States and United Kingdom, which both run current account deficits.

Related question – does that mean it’s OK for a country to continuously run a current account deficit?

Although current account surpluses tend to be reported as “good” or “healthy”, while deficits are often regarded as “bad”, a current account deficit itself is neither good nor bad.

Current account also refers to the amount of capital flowing in and out to finance government and business spending.

• Current account surplus = exporting capital, net lender
• Current account deficit = importing capital, net borrower

So whether a current account deficit is good or bad depends on what’s happening to the money you’re borrowing. If you’re investing the money that has a higher rate of return than the interest you’re paying, then you’re fine.