Define current account and capital/financial account; what does a current account surplus imply for the capital/financial account?

• A. Surplus equals surplus
• B. Deficit of opposite sign
• C. No relation
• D. Both zero

Answer: (B)

The balance of payments works as a single accounting identity: what a country earns from abroad in the current account must be matched by capital flows recorded in the capital/financial account. The current account tracks trade in goods and services plus net income from abroad and net transfers. A surplus here means the country is saving more than it is investing domestically, so the excess saving is lent to foreigners or invested abroad. That outward flow of funds shows up in the capital/financial account as a deficit, because it records net purchases of foreign assets by residents (net capital outflow). Therefore, a current account surplus implies a capital/financial account deficit of the same size (ignoring any statistical discrepancies).