## Step-by-Step Solution ### **Step 1: Understanding the Balance of Payments** The **Balance of Payments (BOP)** is an accounting record of all monetary transactions between a country and the rest of the world. - **Key Principle:** The BOP must always balance (i.e., sum to zero), as all transactions are double-entry (debits = credits). ### **Step 2: Analyzing the Data** #### **Year 1** - **Imports:** 150 - **Exports:** 110 - **Net Exports:** 110 - 150 = **-400** (Deficit) #### **Year 2** - **Imports:** 200 - **Exports:** 160 - **Net Exports:** 160 - 200 = **-400** (Deficit) ### **Step 3: Interpreting Net Exports** - **Net exports** is a component of the **current account** in the BOP. - A **negative net export** (deficit) means the country is spending more on foreign goods/services than it is earning from exports. ### **Step 4: Ensuring BOP Consistency** - If the **current account** is in deficit (**-400**), the **capital and financial account** must be in surplus (**+400**) to balance the BOP. - The chart shows net exports stabilize at **-400** through Year 2. ### **Step 5: Final Assessment for Year 2** - **Current Account:** -400 (deficit) - **Capital/Financial Account:** +400 (surplus) - **Overall BOP:** \[ \text{Current Account} + \text{Capital/Financial Account} = -400 + 400 = \] - The Balance of Payments is **balanced** by construction. --- ## **Final Answer** ### **Is the Balance of Payments in Year 2 in surplus, deficit, or balanced?** --- # **The Balance of Payments in Year 2 is BALANCED.** *Although the current account has a deficit, it is offset by a surplus in the capital/financial account, ensuring overall balance.*