Question
In the Balance of Payments (Bo
- P accounting, a surplus in the Current Account must be matched by:
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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