Question

“Direct foreign investment affects both the financial account and the current account over time.” Agree? Disagree? Explain.

I need a clear answer for this question. Thanks.

Answer 1

The trade current account is an account that keeps a record for the sum of the balance of trade which includes both the balance of goods and services exported by the country less its imports from the other country. the net income earned by the country from abroad and considering its net current transfers. Financial account is a component of a country's balance of payments that covers claims on or liabilities to non-residents, specifically in regard to financial assets.

Therefore, an increase in the inflow to the country of the foreign direct investments shall induce or inject more investment in the domestic economy and which shall negatively impact the current account balance of the country. While the rising inflows of the foreign direct cashfloes eilllead to rising imports in the country which shall ahve an impact the current account balance of a country.

So, it is correct to say that the Direct foreign investment affects both the financial account and the current account over time.