Question

There are three categories within the Balance of Payments; the Current Account, the Capital (Financial) Account, and the Official Reserve Account. Each of the accounts can have a surplus or deficit over a period (year).  Answer the following questions in one paragraph (75-100 words) each, please include at least one external source to support your answers.:

1.) Do these accounts actually need to be balanced? Why or why not?
2.) What is significant about each account if they show a surplus or deficit?
3.) What would cause an imbalance in each account?
4.) Why is the Current Account the most followed account?

Answer 1

1. Given each transaction is recorded as a debit and credit both in double entry accounting, the Current account and Capital account should match as credits must be equal to debits. The Official rrserve account is a part amd parcel of Capital account.

2. A deficit in current account implies the country is a net debtor to the world and may result in deterioration of foreign currency assets. A surplus in current account implies the country is a net creditor to the world and relects healthy position for its foreign currency assets. A deficit in Capital account relects that the country is unable to attract investment from FII/FDI and can adversely affect its growth prospects.

3. Imbalances mainly occur in a fixed exchange rate regime and can result from foreign exchange interventions of the Central Bank. For a floating exchange rate regime, the balance of payments should be in equilibrium by varying the exchange rate suitably.

4. The Current account is most important metric since it measures the trade position of the country, direct investments and the asset position of its residents whether they are productively employed.

Reference: https://thefactfactor.com/facts/management/international-finance/balance-payments/559/