AP Macroeconomics Quiz: Balance Of Payments Accounts

20 questions · exam conditions

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Balance Of Payments AccountsQuestion 1 of 20

Based on the balance of payments information shown for Country H (values in billions of dollars), which transaction would be recorded as a current account credit?

Transactions for Country H:

Domestic consumers buy imported clothing: $18
Foreign tourists purchase domestic hotel services: $12
Domestic investors buy foreign government bonds: $9
Foreign investors purchase domestic factories: $20

Domestic consumers buy imported clothing:

18

billion.

Foreign tourists purchase domestic hotel services:

12

billion.

Domestic investors buy foreign government bonds:

9

billion.

Foreign investors purchase domestic factories:

20

billion.

All four transactions are current account credits.

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AP Macroeconomics Quiz

AP Macroeconomics Quiz: Balance Of Payments Accounts

Practice Balance Of Payments Accounts in AP Macroeconomics with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Balance Of Payments Accounts, giving you a quick way to practice the rules, question types, and explanations that matter most for AP Macroeconomics.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Based on the balance of payments information shown for Country H (values in billions of dollars), which transaction would be recorded as a current account credit?

Transactions for Country H:

Domestic consumers buy imported clothing: $18
Foreign tourists purchase domestic hotel services: $12
Domestic investors buy foreign government bonds: $9
Foreign investors purchase domestic factories: $20

Domestic consumers buy imported clothing: $18$ billion.
Foreign tourists purchase domestic hotel services: $12$ billion. (correct answer)
Domestic investors buy foreign government bonds: $9$ billion.
Foreign investors purchase domestic factories: $20$ billion.
All four transactions are current account credits.

Explanation: Current account credits increase the account balance (money flowing IN), while debits decrease it (money flowing OUT). Imported clothing represents money leaving to pay foreign producers (debit), foreign tourists buying domestic services brings money in (credit), and both investment transactions belong in the financial account, not current account. Only foreign tourists purchasing domestic hotel services is a current account credit - it's an export of services that brings foreign currency into the country. Students often think imports are credits because they receive goods, but follow the money: imports send money abroad (debit), exports bring money home (credit). The rule: if foreign money enters for goods/services, it's a current account credit.

Question 2

Based on the balance of payments information shown for Country B (values in billions of dollars), which transaction should be recorded as a financial account credit (inflow)?

Transactions:

Domestic consumers buy $35 of imported electronics
A domestic firm earns $12 in dividends from its factory abroad
Foreign investors buy $50 of domestic government bonds
Domestic investors buy $20 of foreign stocks

Domestic consumers buy $35 of imported electronics.
A domestic firm earns $12 in dividends from its factory abroad.
Foreign investors buy $50 of domestic government bonds. (correct answer)
Domestic investors buy $20 of foreign stocks.
A domestic firm pays $12 in dividends to foreign shareholders.

Explanation: The current account captures trade in goods and services plus income flows, whereas the financial account deals with purchases and sales of assets like bonds and stocks across borders. Here, foreign investors buying domestic government bonds represents a financial account credit because it involves capital flowing into the country as foreigners acquire domestic assets. The accounts offset since a deficit in one implies a surplus in the other to maintain overall balance, reflecting that imported goods must be financed by capital inflows or vice versa. One misconception is mistaking dividend earnings from abroad as a financial transaction, but that's actually an income receipt in the current account. A useful strategy is to follow the money flow: determine if the transaction involves buying/selling real goods or services versus financial claims.

Question 3

Based on the balance of payments information shown for Country D (values in billions of dollars), what is the current account balance?

Transactions for Country D:

Exports of goods and services: $180
Imports of goods and services: $210
Income receipts from abroad: $25
Income payments to abroad: $5
Foreign investors purchase Country D government bonds: $30
Country D residents purchase foreign real estate: $20

The current account is $-60$ billion.
The current account is $-10$ billion. (correct answer)
The current account is $+10$ billion.
The current account is $+60$ billion.
The current account is $0$ billion.

Explanation: The current account balance equals net exports plus net income flows, capturing all non-investment transactions. For Country D: Current Account = Exports ( $180) - Imports ($ 210) + Income receipts ( $25) - Income payments ($ 5) = -$10 billion deficit. The financial account transactions (foreign bond purchases and domestic real estate purchases abroad) don't affect the current account calculation. A current account deficit means the country consumes more goods/services than it produces, requiring foreign financing. Students often include all transactions, but remember: current account only includes trade and income, not asset purchases. The strategy: separate flows of goods/services/income from flows of investments.

Question 4

Based on the balance of payments information shown for Country A (values in billions of dollars), which statement correctly identifies the current account balance and the financial account balance for the year?

Transactions:

Exports of goods and services: $220
Imports of goods and services: $260
Income receipts from abroad (net investment income received): $30
Income payments to foreigners (net investment income paid): $10
Domestic residents purchase foreign bonds: $40
Foreign residents purchase domestic real estate: $60

The current account is a $20 billion surplus and the financial account is a $20 billion deficit.
The current account is a $20 billion deficit and the financial account is a $20 billion surplus. (correct answer)
The current account is a $40 billion deficit and the financial account is a $40 billion surplus.
The current account is a $20 billion surplus and the financial account is a $20 billion surplus.
The current account is a $20 billion deficit and the financial account is a $20 billion deficit.

Explanation: The current account records a country's transactions in goods, services, and income with the rest of the world, while the financial account tracks investments and capital flows between countries. In this case, the current account balance is calculated as net exports ( $220 - 260 = -40$ ) plus net income ( $30 - 10 = +20$ ), resulting in a $20 billion deficit, and the financial account shows a net inflow from foreign purchases of real estate ($ 60) minus domestic purchases of foreign bonds ($40), yielding a $20 billion surplus. These accounts must offset each other because every international transaction involves an exchange that balances outflows and inflows in the overall balance of payments. A common misconception is confusing income payments with capital flows, but income relates to earnings on past investments, not new asset purchases. To analyze such problems, follow the money flow: trace whether funds are entering or leaving the country through trade or investment channels.

Question 5

Based on the balance of payments information shown for Country C (values in billions of dollars), what is the net exports component of the current account?

Transactions:

Exports of goods and services: $180
Imports of goods and services: $150
Interest income received from abroad: $8
Interest income paid to foreigners: $18
Foreign residents purchase domestic corporate stock: $25
Domestic residents purchase foreign real estate: $45

$+30$ billion. (correct answer)
$-30$ billion.
$+20$ billion.
$-20$ billion.
$+10$ billion.

Explanation: The current account includes net exports of goods and services along with net income from abroad, while the financial account records cross-border asset transactions like stock and real estate purchases. For this question, net exports are simply exports ( $180) minus imports ($ 150), equaling +$30 billion, independent of income or financial flows listed. These accounts must balance each other out because the balance of payments identity ensures that current account surpluses are matched by financial account deficits, funding international trade. A frequent misconception is including interest income in net exports, but net exports focus solely on goods and services trade. Always follow the money flow by categorizing transactions into trade (current) or investment (financial) to avoid confusion.

Question 6

Based on the balance of payments information shown for Country I (values in billions of dollars), which statement correctly identifies the current account balance and the offsetting financial account balance?

Assume $CA + FA = 0$ (ignore the capital account).

CA $= -6$ and FA $= +6$ , implying net capital inflow.
CA $= +6$ and FA $= -6$ , implying net capital outflow. (correct answer)
CA $= -6$ and FA $= -6$ , implying net capital outflow.
CA $= +6$ and FA $= +6$ , implying net capital inflow.
CA $= 0$ and FA $= 0$ , implying no net capital flow.

Explanation: The current account and financial account must offset each other (CA + FA = 0) because international transactions always have two sides - earning/spending and the corresponding financing. For Country I, calculate CA: exports ( $90) minus imports ($ 78) gives a trade surplus of +$12 billion, plus net income (income received $4 minus income paid $10 = -$ 6 billion), resulting in CA = +$12 - $6 = +$ 6 billion. With a current account surplus of + $6 billion, the financial account must equal -$ 6 billion to satisfy CA + FA = 0. This negative FA represents net capital outflow - Country I earns more than it spends internationally, so it accumulates foreign assets (lends to the world). A common error is thinking CA surplus means attracting investment; it actually means the opposite. The strategy: surplus countries export capital (FA negative), deficit countries import capital (FA positive).

Question 7

Based on the balance of payments information shown for Country F (values in billions of dollars), which financial account outcome is consistent with the current account shown, using $CA + FA = 0$ (ignoring the capital account)?

Transactions this year:

Exports of goods and services: $+90$
Imports of goods and services: $-140$
Income receipts from abroad: $+8$
Income payments to foreigners: $-18$

Financial account surplus of $+60$ . (correct answer)
Financial account deficit of $-60$ .
Financial account surplus of $+50$ .
Financial account deficit of $-50$ .
Financial account balance of $0$ .

Explanation: First, we calculate Country F's current account balance by summing all trade and income flows: exports (+90) + imports (-140) + income receipts (+8) + income payments (-18) = +90 - 140 + 8 - 18 = -60 billion. This represents a current account deficit of 60 billion dollars. The balance of payments identity CA + FA = 0 tells us that the current and financial accounts must offset each other. Since the current account is -60, the financial account must be +60 to balance. A financial account surplus of +60 billion means Country F is attracting net capital inflows of 60 billion dollars from foreign investors. This makes economic sense: when a country spends more on imports and foreign payments than it earns from exports and receipts, it must finance this gap by borrowing from abroad or selling assets to foreigners. The strategy is to recognize that deficits must be financed through the opposite account.

Question 8

Based on the balance of payments information shown for Country G in 2025 (values in billions of dollars), which set of entries correctly records the following two transactions: (i) Country G imports $30$ billion of machinery, and (ii) foreigners purchase $30$ billion of newly issued Country G corporate bonds?

Assume imports are recorded as negative in the current account and foreign purchases of domestic assets are recorded as positive in the financial account.

Current account $+30$ ; financial account $-30$ .
Current account $-30$ ; financial account $+30$ . (correct answer)
Current account $+30$ ; financial account $+30$ .
Current account $-30$ ; financial account $-30$ .
Current account $0$ ; financial account $+30$ .

Explanation: The current account records imports as negative entries (money flowing out for goods), while the financial account records foreign purchases of domestic assets as positive entries (money flowing in for assets). For Country G's two transactions: (i) importing $30 billion of machinery creates a -30 entry in the current account, and (ii) foreigners purchasing $30 billion of Country G bonds creates a +30 entry in the financial account. These transactions perfectly offset each other, demonstrating how a trade deficit (importing machinery) is financed by a capital inflow (selling bonds to foreigners). This illustrates the fundamental balance of payments principle: every transaction has two equal and opposite entries. A common error is recording both as the same sign, forgetting that imports represent outflows while foreign investment represents inflows. The strategy: follow the money - when Country G imports machinery, money flows out (-30 in current account); when foreigners buy Country G bonds, money flows in (+30 in financial account).

Question 9

Based on the balance of payments information shown for Country B (values in billions of dollars), which statement correctly identifies whether Country B has a current account surplus or deficit and the corresponding direction of net capital flows in the financial account?

Assume $CA + FA = 0$ (ignore the capital account).

Current account surplus of $10$ ; financial account deficit of $10$ (net capital outflow). (correct answer)
Current account deficit of $10$ ; financial account surplus of $10$ (net capital inflow).
Current account surplus of $10$ ; financial account surplus of $10$ (net capital inflow).
Current account deficit of $10$ ; financial account deficit of $10$ (net capital outflow).
Current account balance of $0$ ; financial account balance of $0$ (no net flow).

Explanation: The current account measures a country's net earnings from trade and income, while the financial account tracks cross-border asset purchases that finance any current account imbalance. To determine Country B's position, calculate CA: exports ( $85) minus imports ($ 70) plus income received ( $5) minus income paid ($ 10) equals + $10 billion, indicating a current account surplus. Since CA + FA = 0, the financial account must equal -$ 10 billion, representing a deficit or net capital outflow. This means Country B is earning more than it spends internationally, so it accumulates foreign assets (residents buy more foreign assets than foreigners buy domestic assets). A key misconception is thinking a CA surplus means capital inflows - it's actually the opposite. The transferable strategy: surplus countries are net lenders to the world (capital outflow), while deficit countries are net borrowers (capital inflow).

Question 10

Based on the balance of payments information shown for Country J (values in billions of dollars), which statement correctly links the current account outcome to the implied direction of net capital flows?

Transactions this year:

Exports of goods and services: $+500$
Imports of goods and services: $-430$
Income receipts from abroad: $+10$
Income payments to foreigners: $-30$

Current account surplus of $+50$ and net capital inflow of $+50$ .
Current account deficit of $-50$ and net capital inflow of $+50$ .
Current account surplus of $+50$ and net capital outflow of $-50$ . (correct answer)
Current account deficit of $-50$ and net capital outflow of $-50$ .
Current account surplus of $+70$ and net capital outflow of $-70$ .

Explanation: To find Country J's current account balance, we sum all components: exports (+500) + imports (-430) + income receipts (+10) + income payments (-30) = +500 - 430 + 10 - 30 = +50 billion. This current account surplus of +50 billion means Country J earns more from foreign transactions than it spends. According to the balance of payments identity CA + FA = 0, if the current account is +50, the financial account must be -50. A financial account deficit of -50 represents net capital outflow: Country J's residents are investing more abroad than foreigners are investing in Country J. This pattern is typical for countries with current account surpluses—they accumulate foreign currency from their net exports and income, which they then invest in foreign assets. The common misconception is thinking surplus countries attract investment, but actually they export capital. The key principle: follow the money—surplus earnings flow out as foreign investments.

Question 11

Based on the balance of payments information shown for Country A in 2025 (all values in billions of dollars, $\$ ), what is the combined balance on the current account (CA) and financial account (FA)? Assume the balance of payments identity $CA + FA = 0$ holds and ignore the capital account.

Transactions for Country A (2025): Exports of goods and services: + $80; Imports of goods and services: −$ 95; Income received from abroad: + $10; Income paid to foreigners: −$ 5; Foreigners purchase Country A bonds: + $18; Country A residents purchase foreign stocks: −$ 8.

CA = − $10 and FA = +$ 10 (correct answer)
CA = + $10 and FA = −$ 10
CA = − $20 and FA = +$ 20
CA = − $2 and FA = +$ 2
CA = + $2 and FA = −$ 2

Explanation: The balance of payments consists of two main accounts: the current account (CA) records trade in goods/services and income flows, while the financial account (FA) tracks investment flows and changes in asset ownership. For Country A, the current account includes exports (+ $80), imports (-$ 95), income received (+ $10), and income paid (-$ 5), totaling CA = +$80 - $95 + $10 - $5 = -$ 10 billion. The financial account includes foreigners buying Country A bonds (+ $18) and Country A residents buying foreign stocks (-$ 8), totaling FA = +$18 - $8 = +$ 10 billion. Since money flowing out through the current account deficit must be offset by money flowing in through the financial account surplus, we verify CA + FA = -$10 + $10 = 0. A common misconception is confusing the signs: remember that in the financial account, foreign purchases of domestic assets are positive (capital inflow). The key strategy is to follow the money: if the current account shows money leaving the country (deficit), the financial account must show money entering (surplus).

Question 12

Based on the balance of payments information shown for Country F (values in billions of dollars), the current account balance is $-15$ billion. Using the accounting identity $\text{CA} + \text{FA} = 0$ , what must be true about the financial account balance?

Selected financial transactions for Country F:

Foreign investors purchase domestic stocks: $28
Domestic residents purchase foreign bonds: $x

The financial account is $+15$ billion, so $x$ must equal $13$ billion. (correct answer)
The financial account is $-15$ billion, so $x$ must equal $43$ billion.
The financial account is $+15$ billion, so $x$ must equal $43$ billion.
The financial account is $-15$ billion, so $x$ must equal $13$ billion.
The financial account is $0$ billion, so $x$ must equal $28$ billion.

Explanation: The balance of payments identity states that Current Account + Financial Account = 0, meaning these accounts must perfectly offset. Given CA = - $15 billion (deficit), the FA must equal +$ 15 billion (surplus). For the financial account: FA = Foreign purchases ( $28) - Domestic purchases abroad ($ x) = +$15. Solving: $28 - $x = $15, therefore $x = $13 billion. A current account deficit requires net capital inflow (positive financial account) to finance it. Students often flip the signs or forget the offsetting relationship. The key insight: money leaving through trade deficit must be replaced by money entering through foreign investment.

Question 13

Based on the balance of payments information shown for Country B (values in billions of dollars), which transaction should be recorded in the financial account rather than the current account?

Transactions this year:

Exports of services: +$90
Imports of goods: −$110
Interest income received from abroad: +$8
Dividends paid to foreign investors: −$6
Foreign direct investment in Country B factories: +$20

Assume only these transactions occur.

Exports of services of $90.
Imports of goods of $110.
Interest income received from abroad of $8.
Dividends paid to foreign investors of $6.
Foreign direct investment in domestic factories of $20. (correct answer)

Explanation: The current account captures flows of goods, services, and primary income like interest and dividends, reflecting a country's trade and earnings position. In contrast, the financial account records capital transfers through investments, such as foreign direct investment in factories or purchases of financial assets. Here, most transactions like exports, imports, and income flows are current account items, but foreign direct investment is a financial account inflow as it involves ownership of productive assets. The accounts offset because any current account imbalance must be financed by financial flows, maintaining the identity CA + FA = 0. One misconception is confusing direct investment with service exports, but it represents asset acquisition, not current trade. A useful strategy is to follow the money flow: if it's paying for ongoing production or income, it's current; if it's buying control or assets, it's financial.

Question 14

Based on the balance of payments information shown for Country G (values in billions of dollars), which option correctly identifies the financial account balance from the listed asset transactions?

Transactions this year:

Foreign investors buy Country G government bonds (inflow): +$60
Country G residents buy foreign real estate (outflow): −$35
Foreign investors sell Country G stocks and buy foreign stocks instead (outflow): −$15

Assume only these financial account transactions occur.

A financial account surplus of $10. (correct answer)
A financial account deficit of $10.
A financial account surplus of $40.
A financial account deficit of $40.
A financial account balance of $0.

Explanation: Financial account records net asset transactions, contrasting with current account's focus on goods, services, and income. Here, inflows from bond purchases exceed outflows from real estate and stock sales, creating a financial surplus. Offsetting with current account maintains equilibrium via CA + FA = 0, balancing international payments. Misconception: viewing stock sales by foreigners as inflows, but they represent outflows as capital leaves the country. Follow the money flow: positive for foreign purchases of domestic assets, negative for domestic buys abroad or foreign sell-offs.

Question 15

Based on the balance of payments information shown for Country I (values in billions of dollars), what is the net exports (exports minus imports) component of the current account, and what is the implied financial account balance?

Transactions for Country I:

Exports of goods and services: $90
Imports of goods and services: $120
Income receipts from abroad: $20
Income payments to abroad: $5
Foreign investors purchase Country I bonds: $25
Country I residents purchase foreign stocks: $10

Net exports $-30$ billion; financial account $+15$ billion. (correct answer)
Net exports $+30$ billion; financial account $-15$ billion.
Net exports $-30$ billion; financial account $-15$ billion.
Net exports $+30$ billion; financial account $+15$ billion.
Net exports $0$ ; financial account $0$ .

Explanation: Net exports (trade balance) is a key component of the current account, calculated as exports minus imports of goods and services. For Country I: Net Exports = $90 - $120 = -$ 30 billion (trade deficit). Current Account = Net Exports (- $30) + Income receipts ($ 20) - Income payments ( $5) = -$ 15 billion. By the balance of payments identity (CA + FA = 0), the Financial Account must equal + $15 billion to offset the current account deficit. This can be verified: FA = Foreign bond purchases ($ 25) - Domestic stock purchases abroad ( $10) = +$ 15 billion. The trade deficit contributes to a current account deficit, which requires foreign financing through a financial account surplus.

Question 16

Based on the balance of payments information shown for Country A (values in billions of dollars), which statement correctly identifies the current account balance and the offsetting financial account balance?\n\nTransactions this year:\n- Exports of goods and services: + $180\n- Imports of goods and services: −$ 220\n- Primary income received from abroad: + $30\n- Primary income paid to foreigners: −$ 10\n- Foreign purchase of Country A bonds (inflow): + $25\n- Country A residents purchase foreign stocks (outflow): −$ 5\n\nAssume only these transactions occur and the balance of payments identity is $\text{CA} + \text{FA} = 0$ .

The current account has a surplus of $20 and the financial account has a deficit of $20.
The current account has a deficit of $20 and the financial account has a surplus of $20. (correct answer)
The current account has a deficit of $40 and the financial account has a surplus of $40.
The current account has a surplus of $40 and the financial account has a deficit of $40.
The current account is balanced at $0 and the financial account is balanced at $0.

Explanation: The current account in a country's balance of payments records transactions involving exports and imports of goods and services, as well as net income flows like wages and investments from abroad. The financial account, on the other hand, tracks investments and asset purchases between residents and foreigners, such as buying bonds or stocks. In this scenario, the transactions show a current account deficit due to higher imports than exports, offset by net positive income, resulting in a $20 deficit, while the financial inflows exceed outflows by $20. These accounts must offset each other because the balance of payments identity requires that $\text{CA} + \text{FA} = 0$, ensuring every international transaction is balanced by an equal and opposite flow. A common misconception is that income payments are part of the financial account, but they belong in the current account as they represent earnings on past investments. To analyze similar problems, follow the money flow: trace whether the transaction is for immediate goods, services, or income (current) versus long-term assets (financial).

Question 17

Based on the balance of payments information shown for Country E (values in billions of dollars), which option correctly computes the current account balance?

Transactions this year:

Exports of goods: +$310
Imports of goods: −$260
Exports of services: +$40
Imports of services: −$70
Primary income received from abroad: +$12
Primary income paid to foreigners: −$22

Assume only these transactions occur.

A current account surplus of $10. (correct answer)
A current account deficit of $10.
A current account surplus of $30.
A current account deficit of $30.
A current account balance of $0.

Explanation: Current account balances encompass trade in goods and services plus net primary income, summarizing a nation's transactional earnings. Financial account deals with investment positions, not directly involved here as only current transactions are listed. The given flows show a surplus from higher exports than imports, adjusted by net negative income, yielding a $10 current surplus. Offsetting with financial account ensures overall balance via CA + FA = 0, financing any surplus or deficit. Common misconception: ignoring service trade, but it must be included with goods for accurate net exports. Follow the money flow by summing all positive inflows and negative outflows category by category to compute balances.

Question 18

Based on the balance of payments information shown for Country J (values in billions of dollars), which option correctly reports the financial account balance?

Transactions:

Foreign residents buy $90 of domestic corporate stock
Foreign banks lend $25 to domestic firms
Domestic residents buy $60 of foreign government bonds
Domestic firms build a $20 factory abroad

A $+35$ billion financial account surplus. (correct answer)
A $-35$ billion financial account deficit.
A $+55$ billion financial account surplus.
A $-55$ billion financial account deficit.
A $0$ billion financial account balance.

Explanation: The current account deals with trade and income, while the financial account sums asset flows: inflows from stock ( $90) and loans ($ 25) minus outflows from bonds ( $60) and factory ($ 20), netting +$35 surplus. Transactions offset with current account implicitly, as capital surpluses fund trade deficits. Accounts must balance to reflect complete international exchanges. A misconception is excluding lending as non-asset, but loans are financial inflows. Follow the money flow: inflows add to FA, outflows subtract.

Question 19

Based on the balance of payments information shown for Country E (values in billions of dollars), which statement correctly describes the trade balance and the direction of net capital flows?

Transactions for Country E:

Exports of goods and services: $150
Imports of goods and services: $190
Income receipts from abroad: $12
Income payments to abroad: $2
Foreign investors purchase Country E corporate bonds: $35
Country E residents purchase foreign stocks: $5

Trade balance is a $+40$ billion surplus and net capital flows are a $+30$ billion inflow.
Trade balance is a $-40$ billion deficit and net capital flows are a $+30$ billion inflow. (correct answer)
Trade balance is a $-40$ billion deficit and net capital flows are a $-30$ billion outflow.
Trade balance is a $+40$ billion surplus and net capital flows are a $-30$ billion outflow.
Trade balance is $0$ and net capital flows are $0$ .

Explanation: The trade balance (exports minus imports) is a component of the current account, while net capital flows appear in the financial account. For Country E: Trade Balance = Exports ( $150) - Imports ($ 190) = - $40 billion deficit. Financial Account = Foreign bond purchases ($ 35) - Domestic stock purchases abroad ( $5) = +$ 30 billion net inflow. A trade deficit means the country imports more than it exports, requiring foreign capital to finance the difference. The positive financial account (capital inflow) partially offsets the negative trade balance. Students confuse signs: trade deficit is negative, but the financing it requires creates a positive capital inflow. Follow the money: buying more imports requires borrowing from abroad.

Question 20

Based on the balance of payments information shown for Country J in 2025 (values in billions of dollars), which statement correctly classifies the income flow and determines the current account balance?

Transactions (billions): exports of goods and services $+200$ , imports of goods and services $-190$ , income paid to foreign owners of domestic firms $-25$ , income received by domestic residents from foreign investments $+5$ .

Net income is $-20$ in the current account, so the current account is $-10$ . (correct answer)
Net income is $+20$ in the financial account, so the current account is $+30$ .
Net income is $-20$ in the financial account, so the current account is $-10$ .
Net income is $+20$ in the current account, so the current account is $+30$ .
Net income is $0$ in the current account, so the current account is $+10$ .

Explanation: Income flows (like dividends, interest, and profits from foreign investments) are recorded in the current account, not the financial account, as they represent returns on existing investments rather than new asset purchases. For Country J: Net income = income received (+5) + income paid (-25) = -20 billion, showing a net outflow of investment income. Current Account = exports of goods and services (+200) + imports of goods and services (-190) + net income (-20) = -10 billion (deficit). The negative net income means Country J pays more to foreign owners of domestic assets than it receives from its foreign investments, likely because foreigners own more productive assets in Country J. A common misconception is placing income flows in the financial account, but remember: the financial account records the purchase/sale of assets, while the current account records the income generated by those assets. The strategy: income flows (dividends, interest, profits) always go in the current account alongside trade flows.