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Question
‘Current account deficit in an economy must be financed by a corresponding capital account surplus’.
Do you agree with the given statement? Give valid reason(s) in support of your answer.
Options
Agree
Disagree
Solution
I agree with the given statement.
Explanation:
Since, in accounting sense; Current Account + Capital Account ≡ 0
If an economy is facing the situation of current account deficit (CAD), the same must be financed through surplus in capital account.
CAD may be setoff through net capital inflows. Transactions like selling off assets or borrowing from abroad, may be instrumental in balancing CAD in Balance of Payments account.
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