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Balance of Payments Explained (Continued)

Picking up from the previous article on National Income Accounting, this article strives to shed some light on the Balance of Payments Account–what it is and how it impacts you. Read on for examples and explanations.

Transaction Types in BP Account

There are three types of transactions (3 accounts) that can take place.

1. Current Account (CA) – transactions that involve imports, exports, investment (like the interest rate).

2. Capital Account (KA) – records non-market activity.

3. Financial Account (FA) – Involves assets (i.e. bonds).

A credit to these accounts (+) is considered a receipt of a payment. A debit to these accoutns (-) is making a payment.

So for example, here are forms of transactions.

Credit Transactions (include):
a) exports(+)
b) unilateral transfers (+)
c) capital inflow; i) increase in foreign asssets in the nation. (ex. US residents buy Canadian stock). ii) reduction in domestic assets abroad.

Debit Transactions:
a) imports (-)
b) transfers
c) capital outflow; i) decrease in foreign assets in the nation, ii) increase in nation’s assets abroad.

Some Keys to Remember

The Balance of Payment Account works out to:
CA + FA + KA = 0

Because the capital account is so small we make the approximation that:

CA approx. = -FA.

Also remember:

Imports --> Capital Inflow; Exports --> Capital Outflow
CA>0 (FA<0) --> Net Capital Outflow
CA<0 (FA>0) --> Net Capital Inflow

[tags]balance of payments, current account, debit transactions, credit transactions, transfer payments[/tags]

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