Question

In terms of the Balance of Payments accounting, in order for there to be a balance, a trade deficit in goods must be offset by a trade surplus in services. Indicate whether you believe the statement is TRUE or FALSE, and then defend your answer.

Answer 1

A trade deficit occurs when a country does not produce enough for its residents or when exports are less than imports of a country. When there is a trade deficit it also implies a current account deficit means merchandise and services are both under the deficit. Hence when current account is in deficit, capital account surplus is used to offset the damage and balance a balance of payment for the country. Capital account tracks capital transfers and nonfinancial assets between individuals and businesses in different countries.

The given statement is false