Choose a country and retrieve the latest data on its budget deficit/surplus and its current balance and explain the relationship. Do government budget deficits always lead to current account deficits? Identify two other possible sources for current account deficits. Are current account deficits necessarily a problem? Explain.
(a) Country chosen: India.
As of July 2015, India's current account balance = - $6.2 billion (Current account deficit)
Budget deficit = $103.1 billion
Source:
(i) https://www.cia.gov/library/publications/the-world-factbook/geos/in.html
(ii) http://www.tradingeconomics.com/india/current-account]
Budget deficit and current account deficit tend to be positively correlated.

(b) According to the Twin Deficit Hypothesis, if there is a budget deficit, to keep the national income equation in balance, there has to be a trade deficit. Since the current account of balance of payments comprises exports and imports of goods and services, current account can be considered an approximation of trade deficit. Therefore, budget deficit and current account deficit (CAD) move in tandem.

(c) However, budget deficits are not solely responsible for CAD. If the economy is growing at such a rate that domestic aggregate demand is rapidly increasing without corresponding increase in domestic aggregate supply, the demand deficit should be met by imports, so the imports increase and CAD increases.

Again, if the domestic currency appreciates due to external global economic factors, the country's exports become uncompetitive (costlier) compared to that of rest of the world, causing a decline in exports. As exports decrease, current account deficit increases. This situation is not caused by budget deficit.

(d) CAD is not necessarily a problem always, especially if it is balanced by a capital account surplus. Capital account is a record of flow of capital in