📚 Learning Guide
Balance of Payments Adjustments
medium

Current Account : Capital Account :: Trade Deficit : ?

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Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
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4
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Choose the Best Answer

A

Trade Surplus

B

Increased Foreign Investment

C

Higher Currency Value

D

Decreased Exports

Understanding the Answer

Let's break down why this is correct

Answer

The current account and capital account are two important parts of a country's balance of payments, which tracks all economic transactions with the rest of the world. The current account includes trade in goods and services, while the capital account records financial transactions like investments. When a country has a trade deficit, it means it is importing more goods and services than it is exporting, similar to how the current account shows the flow of trade. In this case, the counterpart to a trade deficit in the capital account would be a capital surplus, where more money is coming into the country through investments than is going out. For example, if a country buys more cars from abroad than it sells, it might attract foreign investors, resulting in a capital surplus to balance the trade deficit.

Detailed Explanation

When a country has a trade deficit, it buys more from other countries than it sells. Other options are incorrect because A trade surplus means selling more than buying; A higher currency value usually means a stronger economy.

Key Concepts

Balance of Payments Adjustments
Current Account and Capital Account Relationship
Trade Dynamics
Topic

Balance of Payments Adjustments

Difficulty

medium level question

Cognitive Level

understand

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