Country Z buys far more goods from abroad than it sells. Its imports of oil and machinery keep rising, while its exports grow slowly. Its citizens working abroad send money home to their families, but this covers only a small part of the gap. Foreign firms have set up new plants in Z, and Z’s companies have borrowed from banks abroad. Even so, the money coming into Z during the year is less than the money going out. Z follows a fixed exchange rate, and its central bank has stepped in to meet the shortfall.
Going by the passage, which of the following best describes Country Z’s position?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → It has a trade deficit and a current account deficit, so it is a borrower from other countries.
Z imports far more goods than it exports, so it has a trade deficit. Remittances cover only a small part of the gap, so the current account is also in deficit.
A country with a current account deficit must borrow or sell assets abroad. So Z is a borrower from other countries.
NCERT (2026-27): “Balance on Current Account Current Account is in balance when receipts on current account are equal to the payments on the 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.” “… Whereas, Deficit BOT or Trade deficit will arise if a country imports more goods than what it exports.” |