Question

Suppose that a country has a trade surplus of \(50 billion, a balance on the capital account of \)10 billion, and a balance on the current account of −\(200 billion. The balance on the capital and financial account is:

a. \)10 billion.

b. \(50 billion.

c. \)200 billion.

d. −$200 billion.

Short answer

None of the given options is correct.

The correct answer is $250 billion.

Step-by-step solution

Exchange-rate system

A nation’s balance of payments is the sum of all the financial transactions between its residents and the residents of foreign nations.

The balance of payments statement is organized into two broad categories: the current account and the capital & financial account.

Computing the capital and financial account 

The equation for the balance of payments will be:

Balance of Payment=current account+capital and financial account

In the given scenario, the country has a trade surplus of $50 billion. The balance on the capital account is $10 billion and on the current account is -$200 billion. Suppose the balance on the financial account is x. The above equation becomes:

$$\begin{gathered} BalanceofPayment=currentaccount+capitalandfinancialaccount \\ 50=\left(-200\right)+\left(x+10\right) \\ x=240 \end{gathered}$$

The balance on the financial account is 240. Thus, the balance on capital and the financial account becomes $250 billion (=240+10).