An article in the Wall Street Journal refers to "debt-strapped emerging markets already struggling with current-account deficits." Source: Anjani Trivedi, "Emerging Markets Suffer Largest Outflow in Seven Years," Wall Street Journal , June 12, 2015. We would expect that countries running large current account deficits also have substantial foreign debts because the sum of the

A. current account and the capital account must equal zero.

B. trade account and the financial account must equal zero.

C. current account and the financial account must equal zero.

D. capital account and the financial account must equal zero.

Question

Business

Savannah Tyler

12 July, 15:07

An article in the Wall Street Journal refers to "debt-strapped emerging markets already struggling with current-account deficits." Source: Anjani Trivedi, "Emerging Markets Suffer Largest Outflow in Seven Years," Wall Street Journal , June 12, 2015. We would expect that countries running large current account deficits also have substantial foreign debts because the sum of the

A. current account and the capital account must equal zero.

B. trade account and the financial account must equal zero.

C. current account and the financial account must equal zero.

D. capital account and the financial account must equal zero.

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Answers (1)

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Braelyn Liu · Answer 1

Answer: The answer is A

Explanation:

The balance of payment is the relationship between a country's receipt from other countries and payments to other countries. In short, the balance of payment is a country's statement of income and expenditure in the international account. It includes payments for both visible and invisible items of trade. Linking the two sides payment and receipt or debit or credit of the balance of payments, we therefore have two sections of the account which are

Current Account : The current account deals with the payment for currently produced goods and services. The current account shows income and expenditure on visible and invisible imports and exports as well as payments and receipt on banking, shipping, insurance, and other services.

Capital Account : This shows the actual transfer of money from one country to the other. money may be transferred from one country to the other for a number of reasons. It may be used for setting up industries (investment) and it may be a direct loan. The balance of payment could be favourable or unfavourable, a favourable balance of payment is the excess of receipt from export over payment for imports, its unfavourable if the payments for imports exceed the receipt for export. This unfavourable balance of payment put a country in a debtor position and requires the movement of resources outside the country to pay the deficit balance. A favourable balance changes the direction of the resources flow in favour of the creditor nation.

In principle, the balance of payment must always balance just as the two sides of a balance sheet must agree in total. This shows the movement of funds or other resources from one country to another, and the direction of flow of funds being determined by the debtor and creditor status of the country.