6.1 Balance of Payments Accounts
The balance of payments records all cross-border transactions; the current account and the capital and financial account must sum to zero.
The balance of payments has two main accounts. The CURRENT account records trade in goods and services (net exports), net investment income earned across borders, and net transfers like foreign aid and remittances. The CAPITAL AND FINANCIAL account records purchases and sales of assets, stocks, bonds, real estate, factories, between countries.
The accounts mirror each other: setting aside statistical discrepancy, they sum to zero. A current account deficit (importing more than you export) is financed by a capital and financial account surplus, foreigners end up acquiring your assets. Dollars that flow out for imports must flow back somehow.
Exam questions drill classification. A U.S. export of wheat: current account credit. A French investor buying U.S. Treasury bonds: capital and financial account credit (an inflow). Dividend income a U.S. firm earns abroad: current account credit, income flows, not asset purchases, stay in the current account.
Key terms for 6.1
Putting foreign purchases of U.S. stocks or bonds in the current account. Asset purchases belong in the capital and financial account; only goods, services, investment income, and transfers go in the current account.
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