A country’s current account shows a surplus of 40 billion USD. Errors and omissions are zero, and its official reserves do not change. Which of the following is correct?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Its capital account shows a deficit of 40 billion USD, and it is a lender to other countries.
With no change in reserves and no errors, the current account and the capital account must add up to zero. A current account surplus of 40 is matched by a capital account deficit of 40.
A current account surplus means the country earns more than it spends abroad and uses the extra to buy foreign assets, so it is a lender to 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.” “6.1.2 Capital Account … Purchase of assets is a debit item on the capital account. If an Indian buys a UK Car Company, it enters capital account transactions as a debit item (as foreign exchange is flowing out of India). …” “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. Current account + Capital account ≡ 0” “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. Alternatively, the country could use its reserves of foreign exchange in order to balance any deficit in its balance of payments. The reserve bank sells foreign exchange when there is a deficit. This is called official reserve sale. The decrease (increase) in official reserves is called the overall balance of payments deficit (surplus). The basic premise is that the monetary authorities are the ultimate financiers of any deficit in the balance of payments (or the recipients of any surplus). …” |