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CFA Level I · CFA Level I Exam · Capital Flows and the FX Market

A country's government runs a fiscal deficit of 4% of GDP and private saving is 3% of GDP above private investment. Using the national income identity, the current account balance is closest to:

The current account balance is about -1% of GDP, a deficit. The private sector's excess saving of 3% is more than offset by the government's 4% fiscal deficit, so the combined net saving position of the economy is negative 1% of GDP.

  1. A-1% of GDP (deficit)Correct
  2. B+1% of GDP (surplus)
  3. C+7% of GDP (surplus)

Explanation

CA = (S_private - I) + (T - G) = 3% + (-4%) = -1% of GDP. Choosing +7% adds the fiscal deficit instead of subtracting it, a sign error. Choosing +1% reverses the overall sign.

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