Question

If foreigners spend more on South African made goods and services than we spend on theirs

A. foreigners must borrow from South Africa or sell South African assets to make up the difference.

B. all South African national saving remains in South Africa.

C. we must borrow from foreigners because of low imports.

D. funds flow in from abroad to help finance South African investment.

E. None of the above.

please explain aswell.

Answer 1

The correct answer is (a) foreigners must borrow from South Africa or sell South african assets.

The reason is as follows:

The foreigner is importing more from SA than exporting to our country. Thus, imports are greater than exports which has resulted in a trade deficit. Due to this, the country is experiencing a current account deficit.

Now, the current account deficit needs to be counterbalanced with the capital account surplus. When the foreigner will borrow from South Africa, funds will flow into their country. This will be registered as a credit item in the capital account. Also, if the foreigner sells its assets, then also the inflow of funds will be registered as credit item in the capital account.

Thus, if the foreigner exercises both or any one of the options, there will be capital account surplus. This will help balance the current account deficit.