Chapter 41, Problem 2MCQ

To determine

The correct option if the current account and financial account balance on BOP are added.

Answer to Problem 2MCQ

Option a is correct.

Explanation of Solution

Explanation for the correct option:

a.

If the current account balance is added to the capital account balance when the exchange rates are determined by market forces then the result would be zero. It is because one account if is in surplus, then the other has to be in deficit. If these two accounts are added, then it will be nullified. Therefore, option a is correct.

Explanation for incorrect options:

b.

The value will be zero rather than 1 if both accounts are added. Therefore, option b is incorrect.

c.

Trade balance represents the net international trade. It includes the difference between the country’s export and imports. Therefore, option c is the incorrect answer.

d.

Net capital flow represents the net investment in assets done by the country. Therefore, option d is incorrect.

e.

If the current account and capital account are added, then it does not represents the trade deficit. Therefore, option e is incorrect.

Economics Concept Introduction

Balance of payment: Balance of payment is the recording of transactions that occur with one country and the rest of the world over a financial period. It records the trading of goods and services and transfers payments.