Macroeconomics
The current account balance provides insights into a country's economic position and international fnancialrelationships.Asurplusonthecurrentaccountsignifesthatthenationisexportingmorevalue than it's importing and is, therefore, a net lender to the rest of the world. Conversely,adefcitonthecurrentaccountindicatesthatacountryisimportingmorethanit'sexporting andis,therefore,anetborrowerfromtherestoftheworld.Thisdefcitcanbefnancedthroughforeign borrowing or by selling assets to foreign investors. The balance on the current account is closely watched by policymakers, economists, and fnancial markets because it reflects a nation's trade competitiveness and its reliance on external fnancing. Persistentcurrentaccountdefcitscanleadtoconcernsaboutacountry'seconomicvulnerabilityandits ability to service foreign debts, making it an important consideration in international fnance. In summary, the current accountinbalanceofpaymentsaccountingisacomprehensivemeasureofa country's international transactions related to goods, services, income, and unilateral transfers. It provides valuable insights into the nation's economic health, trade relationships, and fnancial interactions with the rest of the world. Financial Account (Capital and Financial Account) Another major part of the BOP is the capital and fnancial account (CFA) which focuses on the internationalownershipofassets.Thecapitalpartofthisaccountrecordstheflowofcapitalbetweena country and others,includingnon-produced,non-fnancialassetslikepatentsandcopyrights,whereas the fnancial part records the sale and purchase offnancialassetsbetweencountriessuchasbonds, stocks,anddirectinvestments.Itrecordstheinflowsandoutflowsoftheinternationalprivateownership of assets (i.e., by private frms and households) and offcial ownership of assets (i.e., government). Transactionsrecordedunderthisaccount docreatealiability astheyrequirerepayment.Therearetwo main components of the CFA: 1. FinancialCapitalTransfers: Alsoknownasfnancialinvestments.Theserepresentthesaleand purchase of fnancial assets such as stocks, bonds, gold, currency, and direct investments betweencountries.Whenacountry’scitizenspurchasefnancialassetsabroad,thetransaction isrecordedasadebitontheCFA.Conversely,whenforeignerspurchasefnancialassetsinthe country(domesticeconomy),thetransactionisrecordedasacreditontheCFA.Itisimportant to understand that the value of the fnancial assets is recorded ontheCFA,whereastheir rewards are recorded on the CA instead. Totalbalanceoffnancialcapitaltransfers=valueoffnancialassetsownedbyforeignersinthe country − value of fnancial assets owned by the country’s citizens abroad 2. Non-Financial Capital Transfers: This includes the purchase and saleofnon-fnancialassets between countries that affect future production and/or savings such as land, factories, copyrights, trademarks, patents, and so on. When a country’s citizens purchase non-fnancial capital abroad, the transaction is recordedasadebitontheCFA.Conversely,whenforeigners purchase non-fnancial capital in the country, the transaction is recorded as a credit on the CFA.
212
© 2024 ACHIEVE ULTIMATE CREDIT-BY-EXAM GUIDE|MACROECONOMICS
Made with FlippingBook - Online Brochure Maker