Question

(19.4) A German investor places some funds with an emerging market stock market fund and intends to leave it there for 5 years and have all dividends paid into a Munich bank ac- count. How will this affect the German current and capital account in each of the next five years?

Answer 1

A balance of payment records both current and capital accounts.

A current account records both exports and imports of goods and services of the economy (trade of goods and services)as well as the unilateral transfers for a particular fiscal year.

a capital account takes into consideration the net sales and purchases of foreign assets and liabilities made in a particular fiscal year. ie the net flow of capital between countries.

The income derived ie the profit or dividends from purchase and sale of the bonds and stocks is recorded in the current account which is known as the investment income.

the capital account will record for only the sale and purchase of these assets which is known as the porfolio investment.

so for the next 5 years the dividends received from the stock would be recorded as the income received from foreign stocks and would be recorded in the current account.

while the funds invested in the beginning in an emerging market would be an investement ie a capital invested so would be recorded in the capital account as an outflow of investment(if it is made outside the economy). it is invested just in the first year .