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      Question

      A country has a Current Account Deficit of $30 billion

      and a Capital Account Surplus of $25 billion. To balance the Balance of Payments, the Financial Account (excluding reserves) must show a:
      A Deficit of $5 billion Correct Answer Incorrect Answer
      B Surplus of $5 billion Correct Answer Incorrect Answer
      C Surplus of $55 billion Correct Answer Incorrect Answer
      D Deficit of $55 billion Correct Answer Incorrect Answer
      E Surplus of $30 billion Correct Answer Incorrect Answer

      Solution

      • The fundamental Balance of Payments (BOP) identity is:
        Current Account (CA) + Capital Account (KA) + Financial Account (FA) + Errors & Omissions (E&O) = 0
        We assume E&O = 0 for simplicity. The problem states: CA = -$30 bn (deficit), KA = +$25 bn (surplus). We need to find FA.
        So, (-30) + (25) + FA = 0 => -5 + FA = 0 =>  FA = +$5 billion .
        A positive FA denotes a  surplus , meaning net financial inflow (more foreign investment coming in than domestic investment going out).

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