Question

Describe balance of payments on current account and balance of payment on financial account. Provide example of each.

Answer 1

Balance of payments on current account - Balance of payments on current account measures the inflow and outflow of materials, investments, payments transfer and services.

It consists of below mentioned components -

a. Trading of goods

b. trading in services

c. Income from investments

d. International addition

Balance of payments on Financial account - Balance of payments on Financial account measures liabilities on non-residents, in particular related to financial assets.

It consists of below mentioned components -

a. Direct investment

b. Reserved assets

c. Portfolio investment

The country's current account deficit in general requires surplus on the financial account.

Example -

Take the example of US and China. If US experiences a current account deficit, it would have surplus on financial account. The US imports manufactured toys from China, which is US's current account deficit and in return China invests the US currency in buying US bonds, which is US financial account surplus.