Skip to content

CA Foundation · Business Economics · International Trade

A country has a current account deficit of $30 billion and a net capital account (financial account) inflow of $22 billion, with errors and omissions being zero. Which of the following correctly describes the position and how it is settled?

The country has an overall deficit of $8 billion, since −30 + 22 = −8. This gap is financed by drawing down foreign exchange reserves. It is not a surplus, and the accounts do not offset unless the reserve change is included.

  1. AOverall deficit of $8 billion, met by drawing down foreign exchange reservesCorrect
  2. BOverall surplus of $8 billion, added to foreign exchange reserves
  3. COverall deficit of $52 billion, met by drawing down foreign exchange reserves
  4. DThe balance of payments is in balance because the accounts always offset, so no reserve change occurs

Explanation

Overall balance = −30 + 22 = −$8 billion, an overall deficit. Such a gap is financed by drawing down official reserves (or borrowing from official sources). The $52 billion figure adds instead of netting the signs, and a surplus misreads the sign. Accounting always balances only when the reserve change is included, so reserves must fall by $8 billion.

Did you get it right without looking?

One question tells you little. A timed set on International Trade shows your real accuracy, how long you take and where you lose marks.

Practise International TradeFree diagnostic mock

More International Trade questions