Question

State two cases of deficits in the balance of payments.

Answer 1

1. Current Account Deficit: This occurs when a country imports more goods, services, and transfers than it exports. For example, if a country spends more on foreign products, travel, and remittances than it earns from exports and tourism, it results in a current account deficit.
2. Capital Account Deficit: This happens when outflows of capital (like loan repayments, investments made abroad) are greater than the inflows (like foreign investments or loans received). It shows that the country is sending more money out than it’s receiving in capital terms.