Balance of payments deficits can be financed validly, but not by tautology

Steps:

• Define balance of payments (BOP) as recording all transactions; current account covers trade and transfers.
• Note a current account deficit means imports exceed exports, requiring financing from other BOP parts.
• Evaluate options for valid government rationales to sustain the deficit.
• Identify invalid explanation as one that misapplies BOP identity without addressing policy choice.

Why A is correct:

• BOP always balances by double-entry accounting (debits equal credits overall), so this is an identity, not a reason to allow a current account deficit.

Why the others are wrong:

• B: FDI inflows on capital account directly finance current account deficits, providing sustainable funding.
• C: Surpluses on capital/financial accounts offset current deficits, maintaining BOP equilibrium.
• D: Cheap imports boost consumption and welfare, justifying tolerance of trade imbalances.

Final answer: A