Question

For each of the following 2 changes (other things equal), has the value of the country's current account balance increased (become more positive of less negative), decreased (become less positive of more negative) or stayed the same?

1-National expenditures of goods and services increase by  $150 billion and production of goods and services increases by $100 billion.

A-Increase

B-Decrease

C-Stay the same

D-None of the above

2- To assist recovery from a foreign disaster, the country gives a foreign transport authority a collection of transport equipment that has been produced in this (donor) country and that is valued at $500m.

		A-Increase
		B-Decrease
		C-Stay the same
		D-None of the above

Answer 1

1. C. It will stay the same because current account records imports and exports of goods and services from one country with rest of the world. But the given increases and decreases are with respect to domestic economy. They do not involve any exchange of goods and services with rest of the world. Hence this transaction does not get recorded in the current account.

2.B. It will decrease because there is a capital transfer from the domestic economy to the foreign country. Hence it counts as an expenditure in the Current account balance. The balance surplus reduces by 500mn or deficit increases by 500mn.