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

An economy has a government budget deficit of 4% of GDP, private saving of 22% of GDP, and private investment of 20% of GDP. Using the saving-investment identity, the current account balance as a percentage of GDP is closest to:

The current account balance is about -2% of GDP. The private sector saves 2% of GDP more than it invests, but the government deficit of 4% of GDP outweighs it, leaving a net deficit of 2% that must be financed by foreign capital.

  1. A-2%Correct
  2. B0%
  3. C+2%

Explanation

CA = (S_private - I) + (T - G). Private balance = 22 - 20 = +2%. Government balance = -4%. CA = 2 - 4 = -2% of GDP. Ignoring the government deficit gives +2%, which is the wrong-sign distractor.

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