CFA Level I · CFA Level I Exam · International Trade
A country runs a persistent current account deficit. Holding other items constant, the balance of payments identity most likely implies that the country must have:
The country must have a combined capital and financial account surplus. The balance of payments accounts sum to zero, so a current account deficit is financed by net capital inflows, such as foreign borrowing or foreign purchases of domestic assets, or by drawing down reserves.
- Aa combined capital and financial account surplusCorrect
- Ba combined capital and financial account deficit
- Ca reduction in its domestic investment
Explanation
The current account plus the capital and financial accounts sum to zero (ignoring statistical discrepancy). A current account deficit therefore needs an offsetting surplus in the capital and financial accounts, meaning net capital inflows. A deficit in both would not balance.
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