Question : Which of the following is not a factor that affects the current account balance?
Option 1: Exchange rates
Option 2: Income levels
Option 3: Capital flows
Option 4: Tariffs and trade barriers
Correct Answer: Capital flows
Solution :
The correct answer is (c) Capital flows.
Capital flows primarily affect the capital account, not the current account. The factors that affect the current account balance include:
a) Exchange rates: Fluctuations in exchange rates can impact the competitiveness of exports and imports, thereby influencing the current account balance.
b) Income levels: Higher income levels can lead to increased consumption and imports, potentially widening the current account deficit. Conversely, lower income levels may result in reduced imports and a smaller deficit or a surplus.
d) Tariffs and trade barriers: Tariffs and trade barriers can affect the cost of imports and exports, impacting the trade balance and subsequently affecting the current account balance.
While capital flows can indirectly influence the current account balance by affecting factors such as investment income, it is not considered a direct factor that affects the current account balance. Capital flows are primarily recorded in the capital account.
