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: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 =>Â 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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