Describe the relationship between balance of payments current account and capital

Current Account Balance of Payments | Economics Help

describe the relationship between balance of payments current account and capital

The balance of payments contains two accounts: current and capital and both are It is concerned with all international trade transactions between citizens of a given What is the meaning of the debit balance of partner capital/a current account? What is the difference between capital account and current account?. Definition of current account balance of payments - imports and A deficit financed by financial flows could be vulnerable to capital flight if. The balance of payments of a country contains two accounts: current and capital. The current account records exports and imports of goods and.

Current Account vs Capital Account — Key differences As you already know current account and capital account are major two components of balance of payments.

Relationship between accounts

And there are many differences between them. Current account is used for trade affairs. Capital account, on the other hand, is used for miscellaneous affairs.

That means capital account gets combined with either current account or financial account to be of any value. Current account is used pretty regularly and the amount is usually small to medium.

describe the relationship between balance of payments current account and capital

Capital account, on the other hand, is used very infrequently and the amount of capital account is usually large but not very large. Current account deals with exports and imports of a country. Capital account deals with the assets, capital transfer of the country.

describe the relationship between balance of payments current account and capital

That means capital account is all about finding the sources of capital and creating the right application for the current account and financial account.

Meaning Current account is the representation of the trade balance of the country and also of the direct payments and net income. Measures The fund inflow and outflow of international trades. The capital is invested and expended in making the international trade happen. Affect changes in Current account affects the net income of the country. The capital account is the smaller section.

describe the relationship between balance of payments current account and capital

It accounts for the net transfer of migrants, foreign aid and non-products non-financial assets such as intellectual property. The financial account refers to the transaction of financial assets and liabilities between Australia and the rest of the world. It records the various types of investment which include, direct investment, portfolio investment, derivatives, reserve assets and other assets.

The balance on the capital and financial account is achieved by adding the categories of the account together.

Current Account Balance of Payments

In order to achieve the balance of payments the balance on the current account and the balance on the capital and financial account are added together.

These should add together and if there is a slight imbalance this is accounted for in the net errors and omissions section.

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Thus we have the balance of payments. The financial inflow on the capital and financial account is needed to finance the deficit on the current account. Additionally, financial inflows coming into Australia increase the size of our net income deficit. This is the case as financial inflows require some sort of return, which is recorded as an outflow on the net income section of the current account.

Loans from overseas require the amount to be paid back as well as debt servicing costs. Foreign assets holdings in Australia require return such as dividends or rent.

Macro 5.1- Balance of Payments

Thus as financial inflows increase the amount of money flowing out on the net income section increases as well. This results in a larger deficit on the current account. Another relationship between the two accounts is the levels of saving and investment in Australia.

Australia has a historically low level of savings and a small population. Thus we require a large financial inflow to finance investment. Balance of Payments and Exchange Rates The balance of payments will be affected by the exchange rate. Appreciations and depreciations of the rate will both have positive and negative effects.

Other things being equal this would cause a fall in demand.

Balance of Payments - Description and Relationship Between it's Three Main Accounts

Thus, the balance on goods and service would deteriorate worsening the CAD. As imports become cheaper, consumption of these goods will increase. This deteriorates balance on goods and services as well as the CAD.