Question

True or False? Explain in detail.

When a country's current account balance is added to its capital account balance, the sum should be positive.

Answer 1

The statement is FALSE.

Current Account includes Balance of Trade, Net Transfer Income and Net Transfer Payments.

On the other hand, Capital Account = Capital Flow from ROW - Capital flows to ROW

ROW represents rest of the world.

Now, both the accounts are part of country's Balance of Payments. It is believed that the Balance of Payments at any time should be zero. If the Current account is in surplus, then this surplus should be used to finance the deficit in the Capital Account.

Similarly, if the Capital Account is in surplus, then the surplus should be used to finance the deficit in the current account.

So, the Sum of Capital and Current Account should and must be equal to 0.

Statement is FALSE