Question

Under the fixed exchange rate system,

1. Is it possible for a country to have positive balances for both of its current account and capital account at the same time? If so, is the situation sustainable or not? Explain.

2. Is it possible for a country to have negative balances for both of its current account and capital account at the same time? If so, is the situation sustainable or not? Explain.

Answer 1

1.   It’s actually possible for a country on economic grounds to have positive balances for its current account, which indicates country's trade balance plus net income and direct payments and measures its balance of payments in terms of Exports as credits and Imports as Debit. A country may have a large current account surplus because of relatively weak domestic demand leading to lower consumer spending and lower spending on imports. And the capital account records purchase and sale transactions of foreign assets and liabilities during a particular year, and a positive balance of capital account indicates net inflow of money into the country, which indeed is a healthy sign for a country’s economy. To put it in nutshell, it can be possible for a country to have positive balances of Capital & Current account in the form of net cash inflow aftermath the higher export rate.
2.   Negative balance on Country’s Current account indicates relatively more imports for the reason of more demand of foreign products relative to the domestic output. Higher imports result in negative balance in the current account possibly because of net cash outflow in the form of purchases, and hence resulting in negative Capital account balance of the country as well. So it is very much possible for a country to have negative balances of both, its capital and current account.