Economic Awareness - Sectors of Indian Economy
Which of the following best explains the relationship between the Current Account and the Capital and Financial Account in the Balance of Payments?
Which of the following best explains the relationship between the Current Account and the Capital and Financial Account in the Balance of Payments?
medium Q4 of 15
Step-by-Step Solution
Step 1: Understand Balance of Payments identity
The Balance of Payments must balance, so a deficit in the Current Account is offset by a surplus in the Capital and Financial Account, and vice versa.Step 2: Analyze options
A deficit in the Current Account is balanced by a surplus in the Capital and Financial Account correctly states this balancing relationship. A surplus in the Current Account causes a deficit in the Capital Account only incorrectly limits the effect to the Capital Account only. The Current Account and Capital Account are independent and do not affect each other ignores the accounting identity. A deficit in the Capital Account leads to a deficit in the Current Account reverses the cause-effect relationship.Final Answer:
A deficit in the Current Account is balanced by a surplus in the Capital and Financial Account → Option DQuick Check:
Current Account deficit = Capital and Financial Account surplus ✅
Quick Trick: BoP always balances: deficit = surplus on other side.
Common Mistakes:
MISTAKES- Assuming accounts can both be in deficit simultaneously.
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