For each of the statements below, explain why the statement is either TRUE or FA
ID: 1223700 • Letter: F
Question
For each of the statements below, explain why the statement is either TRUE or FALSE.
(c) “If a country’s balance on current account is a net debit of $5,000, then the country’s capital/financial account balance (including all government capital/financial flows as well as all private capital/financial flows) must show a net capital/financial inflow of $5,000.”
(d) “If country A makes a unilateral transfer of $1,000 of goods to country B, then, in this time period and other things equal, country A’s merchandise trade balance will be $1,000 more positive than would otherwise have been the case. However, country A’s current account balance will be the same as would otherwise have been the case.”
Explanation / Answer
(c) TRUE
Net debit in current account means Imports exceed Exports and current account is on a deficit. To balance, the financial account has to be an equal amount of net credit balance, indicating a net capital/financial inflow.
(d) FALSE
A unilateral transfer has no effect on merchandise trade balance, but it will impact the current account balance (CAB). So, CAB will be $1000 less than what would have been otherwise.
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