What constitutes a country's current account deficit?

A country's current account deficit is defined as the difference between its total exports and total imports of goods and services, as well as net income and net current transfers. This means that if a country is importing more than it is exporting, it will experience a current account deficit.

When considering the components that contribute to this deficit, government and private sector balances play a crucial role. The current account reflects not just the transactions related to trade but also income flows and transfer payments between countries. Therefore, both government and private sector deficits can contribute to the overall current account position.

The correct answer encapsulates the idea that a current account deficit can exist when the combined deficits of both the government and private sectors result in a negative balance. This aggregate deficit indicates a country's reliance on foreign capital to finance excess spending over its income.

In contrast, a choice focusing solely on government deficits or private sector deficits fails to account for the collaborative impact of both sectors, and a surplus would represent the opposite condition, where a country is saving or earning more than it is spending, thus contributing to a current account surplus rather than a deficit.