Balance of Payments

Choose the Correct Answer

Correct Answer : Option d

Explanation
Item 1 is correct: A current account surplus means an economy is exporting a greater value of goods and services than it is importing. A country with a current account surplus will have a deficit on the financial/capital account. i.e. a country with a current account surplus will have surplus foreign exchange it can use to invest in other countries. A surplus often indicates strong export performance, which can boost employment in industries involved in producing export goods.

Item 2 is correct: A current account surplus suggests that a significant portion of the country's production is being sent abroad rather than being consumed domestically.

Item 3 is correct: Another element of a current account surplus is that the country will be accumulating foreign assets. With a large current account surplus (and inflow of foreign currency), China has been purchasing assets around the world – including US bonds and investment in Africa. In the first half of the Twentieth Century, the US was the dominant manufacturing nation. It ran large current account surpluses; during this period it was a net exporter of capital. US firms and governments are investing abroad and accumulating foreign assets which can earn profit, dividends and rent.