What can lead to a large current account deficit in a country?

A large current account deficit in a country can arise from several factors, and one significant cause is the overvaluation of a currency. When a country's currency is overvalued, it makes its goods and services more expensive for foreign buyers, causing exports to decline. Simultaneously, it makes foreign goods and services cheaper for domestic consumers, leading to an increase in imports. This imbalance results in a larger current account deficit as the country spends more on imports than it earns from exports.

In contrast, options like increased domestic production, reduction in foreign investments, and improvement in trade balances would not typically lead to a current account deficit. Increased domestic production might enhance the capacity to export and reduce reliance on imports, thereby potentially narrowing the deficit. Reduction in foreign investments might lower the income received from abroad but does not directly contribute to a deficit in the current account. Improvement in trade balances would directly reduce the current account deficit as it indicates either increased exports or decreased imports, therefore offsetting the deficit in that account.