Under floating exchange rates,the capital account balance is equal to the negative of

Question

Quizplus · Accepted Answer

The capital account balance under floating exchange rates is equal to the negative of the trade balance plus unilateral transfers. This is because the sum of the trade balance and unilateral transfers represents the net inflow or outflow of goods and services, while the capital account reflects the net inflow or outflow of financial assets. When there is a deficit in the trade balance and unilateral transfers (i.e. an outflow of goods and services from the domestic economy), it must be financed by a corresponding capital inflow (i.e. an inflow of foreign investment or borrowing). Therefore, the capital account balance must be equal to the negative of the trade balance plus unilateral transfers to balance the overall balance of payments.

Under Floating Exchange Rates,the Capital Account Balance Is Equal to the Negative