Question

Please explain the general relationship between the current account and the capital account for the following three countries, AND if the relationships are different, please explain why? [Word limit: 500 words]
a) China
b) Japan
c) United States

Answer 1

The current account and capital account are the two major elements of the balance of payment accounts in international trade.

Base for the solution:

The current account and capital account are the two major elements of the balance of payment accounts in international trade.

The current account records the transactions of import and exports of goods. It includes the balance of trade, factor incomes, and transfer payments.

The capital account records the financial transactions such as inflow and outflow of capital. It includes investments, loans, banking balances.

The balance of payment account is the summation of these two accounts and the sum up to zero.

China has recorded a surplus in the current account since the 1990s, industries' competitiveness and export-driven model helps in large current account surpluses.

The balance of the payment account of China is not is balanced due to low foreign economic development.

Japan has recorded a surplus in the current account, continuously which might reflect the weak yen and the competitiveness of the industries. Huge capital export is the reason why the yen as not appreciated much.

The United States has recorded the deficit in its current account since the 1980s, primarily due to high-interest rates due to federal budget deficits which are keeping the dollar strong, and the other reason for the deficit is the weak competitiveness of the industries in the U.S.

Countries' different policies and business models are the reason for the change in behavior of the balance of payment.