Balance of Payments Equilibrium

The balance of payments is a record of all financial transactions made between one country and the rest of the world over a period of time. It is made up of two accounts: the current account and the capital account.

Current Account

The current account records all transactions involving the import and export of goods and services, and the income earned by a country's residents from foreign investments. If the value of a country's imports exceeds the value of its exports, it is said to have a current account deficit. Conversely, if the value of a country's exports exceeds the value of its imports, it is said to have a current account surplus.

Capital Account

The capital account records all transactions involving the purchase and sale of assets, such as stocks, bonds, and real estate, between a country and the rest of the world. If a country is borrowing more money from the rest of the world than it is lending, it is said to have a capital account surplus. Conversely, if a country is lending more money to the rest of the world than it is borrowing, it is said to have a capital account deficit.

Equilibrium

For a country's balance of payments to be in equilibrium, the sum of its current account and capital account balances must be zero. This means that any deficit in the current account must be offset by a surplus in the capital account, or vice versa.

Option C

Option C is the correct answer because either a surplus in the current account equals to the deficit in the capital account or a surplus in the capital account equals to the deficit in the current account is necessary to achieve balance of payments equilibrium. In other words, if a country has a current account deficit, it must have a capital account surplus in order to achieve equilibrium, and if it has a current account surplus, it must have a capital account deficit.

Conclusion

In summary, balance of payments equilibrium is achieved when the sum of a country's current account and capital account balances is zero. This can be achieved either by having a surplus in the current account and a deficit in the capital account, or by having a surplus in the capital account and a deficit in the current account.