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FRM Part I · FRM Exam Part I · Foreign Exchange Markets

In a country's balance of payments, a surplus on the financial account (net capital inflow) is most consistent with which of the following, assuming the official reserve change and statistical discrepancy are zero?

A financial account surplus is matched by a current account deficit of equal size, because the balance of payments must sum to zero when official reserve changes and statistical discrepancies are zero. Net capital inflows finance the excess of imports over exports.

  1. AA current account deficit of equal sizeCorrect
  2. BA current account surplus of equal size
  3. CA trade surplus that exceeds the capital inflow
  4. DA zero current account balance

Explanation

The balance of payments must sum to zero: current account + capital/financial account + change in official reserves = 0. With reserves and discrepancy at zero, a financial account surplus must be offset by a current account deficit of equal size. A current account surplus would add to the imbalance rather than offset it.

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