Which of the following statements are correct?
(A) Any current account deficit must be financed by a capital account surplus, that is, a net capital inflow.
(B) In balance of payments equilibrium, the current account deficit is financed entirely by international lending without reserve movements.
(C) A country with a current account deficit is a lender to other countries.
(D) A capital account surplus arises when capital inflows are less than capital outflows.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A) and (B) only
A current account deficit is paid for by net capital inflow. If that inflow covers it fully, reserves do not move.
(A) Any current account deficit must be financed by a capital account surplus, that is, a net capital inflow. — Correct. The country must sell assets or borrow abroad.
(B) In balance of payments equilibrium, the current account deficit is financed entirely by international lending without reserve movements. — Correct. Lending covers the whole deficit and reserves do not change, which is BoP equilibrium.
(C) A country with a current account deficit is a lender to other countries. — Incorrect. A deficit makes the nation a borrower; a surplus makes it a lender.
(D) A capital account surplus arises when capital inflows are less than capital outflows. — Incorrect. A surplus needs inflows greater than outflows.
NCERT (2026-27): “6.1.3 Balance of Payments Surplus and Deficit … Thus, any current account deficit must be financed by a capital account surplus, that is, a net capital inflow.” “In this case, in which a country is said to be in balance of payments equilibrium, the current account deficit is financed entirely by international lending without any reserve movements. …” “Balance on Current Account … A surplus current account means that the nation is a lender to other countries and a deficit current account means that the nation is a borrower from other countries.” “Balance on Capital Account … Surplus in capital account arises when capital inflows are greater than capital outflows, whereas deficit in capital account arises when capital inflows are lesser than capital outflows.” |