Question

When there is no change in central banks holding of international reserves, a country's:

• A. Trade balance always equals to zero
• B. Current account balance always equals to zero
• C. Capital account balance always equal to zero
• D. Balance of payment always equal to zero

Hint:

Individual accounts like trade account or current account may show surplus or deficit, but the overall Balance of Payments always balances after reserve adjustments.

Answer 1

The Correct Option is D

Concept: Balance of Payments records all economic transactions of a country with the rest of the world. It includes current account, capital account, financial account, and change in official reserves.

Step 1: Understanding balance of payments.
The overall balance of payments is adjusted through changes in foreign exchange reserves. \[ BOP = \text{Current Account} + \text{Capital/Financial Account} + \text{Change in Reserves} \]

Step 2: Applying the given condition.
The question says there is no change in central bank's international reserves. \[ \Delta \text{Reserves} = 0 \] This means the external accounts balance without requiring reserve adjustment.

Step 3: Understanding why other accounts need not be zero.
Trade balance may be surplus or deficit.
Current account may be surplus or deficit.
Capital account may also be surplus or deficit.
But the overall Balance of Payments must balance. Therefore, the correct answer is Balance of payment always equal to zero.