If a country has a Current Account Deficit, it means: 1. It is spending more than it receives from sales to the rest of the world. 2. It implies that the country is accumulating foreign exchange reserves. 3. It implies that the country is a net borrower from the rest of the world. Which of the statements given above is/are correct?

The correct option is 1 and 3 only. Explanation The Balance of Payments (BoP) records all economic transactions between residents of a country and the rest of the world. The Current Account specifically measures the flow of goods, services, and income (primary and secondary). A Current Account Deficit (CAD) occurs when the total value of goods, services, and transfers imported exceeds the value of those exported. Statement-wise Analysis: - Statement 1 is Correct: A Current Account Deficit indicates that a country is importing more goods, services, and capital than it is exporting. In economic terms, the country is spending more foreign currency on payments to the rest of the world than it is receiving from its sales (exports) and income transfers. - Statement 2 is Incorrect: A CAD implies a net outflow of foreign currency on the current account. To settle this deficit, the country must either use its existing foreign exchange reserves or secure capital inflows (borrowing or investment). Therefore, a CAD typically exerts downward pressure on foreign exchange reserves rather than leading to their accumulation. Accumulation of reserves is generally associated with a Current Account Surplus or a massive Capital Account Surplus. - Statement 3 is Correct: Since the country is spending more than it earns, it must finance the difference. This financing comes from the Capital Account in the form of foreign direct investment, portfolio investment, or external borrowing. Consequently, a country running a CAD is effectively a net borrower from the rest of the world or is selling its domestic assets to foreigners to pay for its excess consumption. Key Takeaway: A Current Account Deficit (CAD) signifies that a nation's total imports of goods, services, and transfers are greater than its exports, making the country a net debtor to the rest of the world.

NCERT Class 12 Economics — Chapter 8: Open Economy Macroeconomics

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If a country has a Current Account Deficit, it means:

It is spending more than it receives from sales to the rest of the world.
It implies that the country is accumulating foreign exchange reserves.
It implies that the country is a net borrower from the rest of the world.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1 and 2 only
B1 and 3 only
C1, 2 and 3
D2 only

Did you get this right?

Solution

The correct option is 1 and 3 only.

Explanation

The Balance of Payments (BoP) records all economic transactions between residents of a country and the rest of the world. The Current Account specifically measures the flow of goods, services, and income (primary and secondary). A Current Account Deficit (CAD) occurs when the total value of goods, services, and transfers imported exceeds the value of those exported.

Statement-wise Analysis:

Statement 1 is Correct: A Current Account Deficit indicates that a country is importing more goods, services, and capital than it is exporting. In economic terms, the country is spending more foreign currency on payments to the rest of the world than it is receiving from its sales (exports) and income transfers.
Statement 2 is Incorrect: A CAD implies a net outflow of foreign currency on the current account. To settle this deficit, the country must either use its existing foreign exchange reserves or secure capital inflows (borrowing or investment). Therefore, a CAD typically exerts downward pressure on foreign exchange reserves rather than leading to their accumulation. Accumulation of reserves is generally associated with a Current Account Surplus or a massive Capital Account Surplus.
Statement 3 is Correct: Since the country is spending more than it earns, it must finance the difference. This financing comes from the Capital Account in the form of foreign direct investment, portfolio investment, or external borrowing. Consequently, a country running a CAD is effectively a net borrower from the rest of the world or is selling its domestic assets to foreigners to pay for its excess consumption.

Key Takeaway:

A Current Account Deficit (CAD) signifies that a nation's total imports of goods, services, and transfers are greater than its exports, making the country a net debtor to the rest of the world.

Your note

More from Chapter 8: Open Economy Macroeconomics

In a fixed exchange rate system, if there is an excess supply of foreign currency, the Central Bank must:

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Which one of the following is considered a primary advantage of a flexible exchange rate system?

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Consider the following statements regarding the "Demand for Domestic Goods" vs "Domestic Demand for Goods": 1. In a closed economy, they are the same. 2. In an open economy, domestic demand for goods excludes imports. 3. In an open economy, the demand for domestic goods excludes exports. Which of the statements given above is/are correct?

hard

Consider the following statements regarding the linkages in an open economy: 1. In an output market linkage, an economy can trade in goods and services with other countries, widening consumer choice. 2. In a financial market linkage, investors are restricted to choosing only between domestic assets. 3. Movement of goods has traditionally been seen as a substitute for the movement of labour between countries. Which of the statements given above is/are correct?

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Consider the following statements regarding the Balance of Payments (BoP): 1. It records only the transactions involving the government sector with the rest of the world. 2. It typically records transactions for a specified time period, usually a year. 3. The Reserve Bank of India currently publishes data according to the new classification of three accounts: current, financial, and capital. Which of the statements given above is/are correct?

hard

Keep practising Chapter 8: Open Economy Macroeconomics

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The correct option is 1 and 3 only.

Explanation

Statement-wise Analysis:

Statement 1 is Correct: A Current Account Deficit indicates that a country is importing more goods, services, and capital than it is exporting. In economic terms, the country is spending more foreign currency on payments to the rest of the world than it is receiving from its sales (exports) and income transfers.
Statement 2 is Incorrect: A CAD implies a net outflow of foreign currency on the current account. To settle this deficit, the country must either use its existing foreign exchange reserves or secure capital inflows (borrowing or investment). Therefore, a CAD typically exerts downward pressure on foreign exchange reserves rather than leading to their accumulation. Accumulation of reserves is generally associated with a Current Account Surplus or a massive Capital Account Surplus.
Statement 3 is Correct: Since the country is spending more than it earns, it must finance the difference. This financing comes from the Capital Account in the form of foreign direct investment, portfolio investment, or external borrowing. Consequently, a country running a CAD is effectively a net borrower from the rest of the world or is selling its domestic assets to foreigners to pay for its excess consumption.

Key Takeaway:

A Current Account Deficit (CAD) signifies that a nation's total imports of goods, services, and transfers are greater than its exports, making the country a net debtor to the rest of the world.