Suppose that a country has a trade surplus of $50 billion, a balance on the capital account of $10 billion,

Suppose that a country has a trade surplus of $50 billion, a balance on the capital account of $10 billion,

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September 3, 2023
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Suppose that a country has a trade surplus of $50 billion, a balance on the capital account of $10 billion, and a balance on the current account of −$200 billion. The balance on the capital and financial account is: LO27.2 a. $10 billion. b. $50 billion. c. $200 billion. d. −$200 billion

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Explanation
c is correct
The balance of payment is in equilibrium if the summation of the current account and financial account is zero. The deficit of $200 billion in the current account must be offset by $200 billion on the capital and financial account. This implies that assets worth $200 billion must be transferred to the foreigners to achieve equilibrium.

a is incorrect
A balance of $7200 billion would lead to a capital and financial account surplus by $7,000 billion. In this situation, more dollars would be flowing to Country U due to increased exports.

b is incorrect
A balance of $1200 billion would lead to a capital and financial account surplus by $1000 billion. In this situation, more dollars would be flowing to Country U due to increased exports.

d is incorrect
A transfer of $100 billion would not offset the current account deficit. The balance of the capital and financial account and capital account should always sum up to zero.

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