Question

Is it possible for a country to have a current account deficit at the same time it has a surplus in its balance of payments? Explain your answer, using hypothetical figures for the current and capital accounts. Be sure to discuss the possible implication for the country’s foreign reserves and exchange rates.

Answer 1

Ans) Balance of payments is the record or statement of all the transactions done between the country and rest of the world.It has three parts viz. Capital account, Current account and Financial account.

Financial account shows the change in international ownership of assets.

Capital account is measure of financial transactions that affect the future income, savings and investment of a country.

Current account includes a country's trade balance.

Current account deficit occurs when the value of import is more than the value of exports.

Surplus in BOP is when total payments made by the country (capital+current+financial) is less than the total payments received by the country.

Hence it is possible to have current account deficit but surplus in balance of payments as current account is sub component of balance of payments.

Large domestic market as a result of surplus protects the country from fluctuations in exchange rates of currency also when there is excess supply of foreign currency,to satisfy this excess supply the bank will start buying foreign reserves.

CURRENT ACCOUNT	(-$400 MILLION)
CAPITAL ACCOUNT	+$600 MILLION
FINANCIAL ACCOUNT	+$1000 MILLION
TOTAL	+$1200 MILLION