Balance of Payments as an Accounting Identity

Steps:

• Recall that the balance of payments (BOP) records all international transactions for a country.
• Understand BOP consists of current account (trade, income) and capital/financial accounts (investments, loans).
• Note that any current account deficit requires borrowing or asset sales, creating a surplus in capital/financial accounts.
• Conclude BOP sums to zero by double-entry bookkeeping, ensuring debits equal credits.

Why B is correct:

• BOP balances as an identity: Current account + Capital account + Financial account = 0 (plus errors/omissions), per international accounting standards.

Why the others are wrong:

• A: Global imbalances exist; one country's BOP balances internally, not via others.
• C: No government action needed; balancing is automatic from transaction recording.
• D: Exchange rates adjust over time but don't cause ex post balancing.

Final answer: B