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Current v Capital Account

pcunniffpcunniff MilwaukeePosts: 18 Associate

Why, in this question, is this a capital account surplus vs a current account surplus? What makes this particular problem Capital?


In 20X5, Carthage's merchandise imports exceeded the value of its merchandise exports. In this case, Carthage would most likely have which of the following?


A)

Current account surplus.


B)

Capital account surplus.


C)

Balance of trade surplus.


Explanation

If a country is running a current account deficit, it must have an inflow of foreign capital, creating a surplus in the capital account.

(Study Session 5, Module 17.2, LOS 17.h)

Related Material

SchweserNotes - Book 2

Comments

  • hey @pcunniff , so if imports exceed exports, we know that it has to be a current account deficit, i.e. Answer A can be eliminated.

    Since Balance of Trade (BOT) is a combination of a country's good and services, we don't have sufficient info in the question to conclude whether the BOT is a surplus or deficit, because the question only stated merchandise and we don't have enough info about other sub-components of current account.

    But because the balance of payments has to balance, i.e. the balances of these 3 components must sum to zero (current account, capital account and financial account). A deficit in one area implies an offsetting surplus in other areas. A current-account deficit implies a capital-account surplus (and vice versa).

    theoutsider
  • pcunniffpcunniff MilwaukeePosts: 18 Associate

    Ahhh i didnt realize they all must sum zero. Thanks again!

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