Read the following statements:
Assertion (A): A country with a deficit in its current account must finance it by selling assets or by borrowing abroad.
Reason (R): A current account deficit means that the country spends more than it receives from sales to the rest of the world.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Both (A) and (R) are true and (R) is the correct explanation of (A).
Assertion (A): A country with a deficit in its current account must finance it by selling assets or by borrowing abroad. — True. The gap must be met by a net capital inflow.
Reason (R): A current account deficit means that the country spends more than it receives from sales to the rest of the world. — True. Payments on current account exceed receipts.
Why R explains A?
A person who spends more than her income must sell assets or borrow. A country is the same. Because it spends more than it earns from the rest of the world, it must sell assets or borrow abroad to pay the difference.
NCERT (2026-27): “6.1.3 Balance of Payments Surplus and Deficit The essence of international payments is that just like an individual who spends more than her income must finance the difference by selling assets or by borrowing, a country that has a deficit in its current account (spending more than it receives from sales to the rest of the world) must finance it by selling assets or by borrowing abroad. Thus, any current account deficit must be financed by a capital account surplus, that is, a net capital inflow.” |