Question

Why must a country with a current account surplus always have a financial account deficit? Please give an explanation.

Answer 1

Current account surplus means that the exports of goods and services is more than the imports of goods and services. This means that there is inflow of foreign exchange.

However, for balance of payments to exists, this must be accompanied by capital outflow. This will occur when there is capital account deficit. Capital accoutn deficit exists when the capital inflow is less than the capital outflow.

Hence, current account surplus must be matched by capital account deficit for balance of payments to exist.