📚 Learning Guide
Current Account and Trade Balance
hard

How does the capital account relate to the current account and the trade balance in the context of international trade and the savings-investment balance?

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Choose the Best Answer

A

A surplus in the capital account indicates a trade deficit in the current account.

B

An increase in savings leads to a decrease in the capital account balance.

C

The capital account is independent of the savings-investment balance.

D

A balanced capital account ensures a balanced trade balance.

Understanding the Answer

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Answer

The capital account and the current account are two important parts of a country's balance of payments, which tracks all economic transactions with other countries. The current account includes trade balance, which is the difference between what a country sells to others (exports) and what it buys (imports). If a country exports more than it imports, it has a trade surplus, and this can lead to an increase in savings, as money flows into the country. On the other hand, the capital account records investments coming in and going out of the country, such as foreign investments or loans. For example, if a country has a trade deficit (imports exceed exports), it may need to attract foreign investments to balance its accounts, showing how interlinked these accounts are in understanding a country's economic health.

Detailed Explanation

When a country has more money coming in from investments than going out, it shows a surplus in the capital account. Other options are incorrect because Some might think that saving more money means less investment abroad; It's a common mistake to think the capital account works alone.

Key Concepts

capital account
international trade
savings-investment balance
Topic

Current Account and Trade Balance

Difficulty

hard level question

Cognitive Level

understand

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