Question

What are the three balance of payments accounts? Briefly describe them. What is the relationship among the three?

Answer 1

Answer) Balance of payments refers to accounting record of all transactions between residents and non - residents. Balance of payments hhas three components Current Account, Capital Account & Finacial account.

Current account  measures a country's trade balance plus the effects of net income and direct payments. When the activities of a country's people provide enough income and savings to fund all their purchases, business activity, and government infrastructure spending, then the current account is in balance. Example Merchandise (Exports Imports), Investment income (rents, profits, interest).

Capital Account measures financial transactions that don't affect a country's income, production, or savings. Example investment flow in the country and investment done aboard , borrowings.

The financial account measures changes in domestic ownership of foreign assets and foreign ownership of domestic assets. If foreign ownership increases more than domestic ownership does, it creates a deficit in the financial account.