Question

Suppose that a certain country has a current account surplus in its balance of payments. Does this mean that the country will necessarily have a financial account deficit? Explain why or why not.

Answer 1

The balance of payment is a statement of transaction that captures the inflow and outflow of goods and services across nations. It has two accounts - current account and financial account.

Current account measures the inflow and outflow of goods, services and unilateral transfer across nations whereas the financial account measures the impact of financial transactions like investment in financial assets across nations.

To make the statement in equilibrium the sum of both should be 0 that is current account balance plus capital account balance =0 to keep the exchange rate intact.

This is because when a country exports goods to another country, it has current account debit which is made 0 with help of credit in the financial account through the funds received from the outside country and the case is vice versa applied too. For every debit transaction there is credit and for every credit there is debit.

I hope this makes sense.

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