What does it mean to have a current account deficit?

What I don't understand is how can a country be in debt when it buys imports? Is it not paid for? Is every imported good paid for by borrowing money from foreign governments? How is it paid? Not by the people buying those imports? And why is it a deficit?
What does it mean to have a current account deficit?
Interesting question. One that connects to the fundamental notion of money:


http://en.wikipedia.org/wiki/Money





The bottom line is that trade is financed by credit. Even money is just a kind of credit. I pay for your goods with pieces of paper we call money and you accept those pieces of paper because you know (or believe) that you can buy other things with those pieces of paper.





Moving up to the country level, all those pieces of my money that people outside me hold are really promises that I will exchange goods and services for those pieces of paper. In that sense, they represent a debt, I.O.U.s





When I export, people are giving me back pieces of my paper money in exchange for my goods.





If I export as much as I import, the amount of my money floating around in the world stays pretty constant.





If I import more than I export, then there are more and more people to whom I owe goods in exchange for money. That is when I have trade deficit.





Now those people who hold my money don't have to use that money to buy my exports. They can trade my money for some other country's money to buy exports from that country; they can hold my money to spend it later; or they can come to my country and buy things (land, companies, etc.) that aren't exports at all. That's called foreign direct investment:


http://en.wikipedia.org/wiki/Foreign_dir...





But even if they end up using it to invest in the U.S., from the trade perspective it is a deficit. If the deficit continues year after year and grows large enough as it does so, then the people who hold my money can buy more and more of my land, more and more of my factories, etc.





One other thing they can do with it is lend me the money at interest. The United States government has borrowed more than 10 trillion dollars.


http://en.wikipedia.org/wiki/United_Stat...


Some of it was borrowed from Americans, but China alone as lent America over a trillion dollars, and japan has lent America almost as much. That means the the U.S. government has to pay interest on these loans. In 2007 the U.S. government paid out about $237 billion dollars in interest:


http://en.wikipedia.org/wiki/Image:U.S._...


With a U.S. population of 300,000,000 people, that comes to about $800 per person just in interest.





As you say, doesn't every import have to be paid for? In the end, the answer is yes, but the question is when and how. You can buy something with cash or with a credit card. You don't have to pay the full credit card bill now, but you do have to pay it eventually. You can pay it off by making something to sell or by selling something you own for your own use.





Obviously, there are better ways of paying it off and worse.





This is a great over-simplification, but I hope it helps.
naming