If you add up all the current accounts of all countries in the world, the sum should be zero. Yet this is not so. Why?

Question

What will be an ideal response?

Answer 1

There is a large, consistently negative sign for the global balance of payments which suggests that the discrepancy cannot simply be due to measurement errors because if it were, the balance would be positive about as often as it is negative. One reason why there is a consistent negative sign in the aggregate errors has to do with tax evasion. Many individuals try to escape taxes on the income from their investments. Hence, they may fail to report the interest income they earn on their foreign securities, which would constitute a credit for their home country's current account balance. Unrecorded earnings in the international shipping business may also account for a large part of the missing surplus. Once again, these would be credits on the service account of the balance of payments. Countries that receive foreign aid may fail to fully account for official aid disbursements. Freer trade has made it more difficult for governments to measure sales accurately, and sales over the Internet may also escape detection.