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      Question

      In the Balance of Payments (BoP) accounting, a surplus

      in the Current Account must be matched by:
      A A surplus in the Capital Account. Correct Answer Incorrect Answer
      B A deficit in the Capital and Financial Account. Correct Answer Incorrect Answer
      C An increase in official foreign exchange reserves. Correct Answer Incorrect Answer
      D Either a deficit in the Capital and Financial Account or an increase in reserves. Correct Answer Incorrect Answer
      E A surplus in the trade balance only. Correct Answer Incorrect Answer

      Solution

      The BoP must always balance. By identity: Current Account (CA) + Capital and Financial Account (KA) + Errors & Omissions = 0. Therefore, if CA > 0 (surplus), then (KA + Reserve Change) must be negative, implying either a net capital outflow (KA deficit) or an increase in official reserves (which is recorded as a negative/credit item? Wait carefully: an acquisition of reserves is a debit in the financial account). More precisely: CA Surplus = Net Capital Outflow (KA Deficit) OR a build-up of foreign assets (including reserves). Option (d) captures this.

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