Surplus in balance of payments leads to ________

1. Analyze the question The question asks what a surplus in the balance of payments (BOP) leads to. A BOP surplus means total receipts from abroad exceed total payments to the rest of the world.

2. Explain the concept The balance of payments records all economic transactions between a country and the rest of the world. It has:

• Current account: trade in goods and services, income, and transfers
• Capital and financial account: investments and loans

When the overall BOP is in surplus, more foreign currency flows into the country than flows out.

3. Step-by-step solution

• Inflows of foreign exchange are greater than outflows.
• The extra foreign exchange is held by the central bank (in Nigeria, the CBN) as external or foreign reserves.
• So foreign reserves increase.

Checking the options:

• A. Government budget surplus: This is about government revenue versus expenditure. It is a fiscal matter and is not directly caused by a BOP surplus.
• B. Increase in foreign reserves: Correct. The surplus is financed by an accumulation of reserves.
• C. Decrease in foreign reserves: This happens with a BOP deficit, when reserves are used up to pay for the shortfall.
• D. None of the above: Wrong, because B is correct.

4. Answer The correct option is B. Increase in foreign reserves.

5. Exam tip Remember: Surplus = Saving up reserves; Deficit = Drawing down reserves. Think of reserves as a country's savings account. A BOP surplus adds money to it, and a deficit takes money out.