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

The above statement is True.

Balance of Payments is the systematic record of all the economic transactions between the residents and the non residents of a country for a specific period of time. Now B.O.P accounts are maintained as per the provisions of double entry accounting system, under this system, two equal entries (debit, credit) are made in the account for every transaction. It is maintained by central bank of every country as per the guidelines of IMF.

Now the Current Account of the BOP consists of Visible entries like goods and the Invisible entries like services. Thus both consist the current account. If a country has negative BOP with respect to goods, then this BOP Current Account can be nullified by having corresponding surplus with respect to services.