The balance of payments must always balance, because:
A)capital account surplus means the outflow of capital.
B)current account surpluses automatically generate transfer of assets to foreigners.
C)current account deficits automatically generate transfer of assets from foreigners.
D)current account deficits automatically generate transfer of assets to foreigners while current account surpluses automatically generate transfer of assets from foreigners.

Question

Quizplus · Accepted Answer

Whenever a country runs a current account deficit, it is borrowing from foreigners to finance its imports. This causes a transfer of assets from the country to foreigners. Conversely, when a country runs a current account surplus, it is exporting more than it imports and thus earning more foreign exchange. This leads to a transfer of assets from foreigners to the country. The balance of payments must always balance because any deficit or surplus in the current account is offset by an equal and opposite surplus or deficit in the capital account. Therefore, a current account deficit generates a transfer of assets to foreigners, while a current account surplus generates a transfer of assets from foreigners.

The Balance of Payments Must Always Balance, Because