Cad + kafa = 0 ?!? (1 Viewer)

[emily_p_]

Hello!

I was wondering if anyone could help me understand why CAD + KAFAS has to equal zero - or in other words why the amount made in the KAFA has to equal to the exact amount (give or take stat errors) in the CA? I understand that there are links between the two account and that a credit in say investment leads to a debit in the NPI section of the current account, but I’m not sure why one account must be exactly the negative of the other. For example, what if we made 10 billion in investments but lost only 7 billion in the NPI (including returns on investment, labour payouts etc), resulting in the CAD being maybe only -30 while the KAFAS is +60?

I’ve also seen these equations in many textbooks:
Supply of $A = Demand for $A
M + Y debits + K outflow = X + Y credits + K inflow
M - X + Y debits - Y credits = K inflow - K outflow

I’m not really sure what these mean or how these are derived. If anyone could explain my two very long (sorry!) questions I would be really grateful.

Thank you!

 

[phat_tar]

Simply the floating exchange rate.

Essentially the BOP records every single supply and demand of the Australian dollar, and since it is a floating exchange rate, supply must meet demand at the equilibrium and equal 0. Thus all the demand is recorded as POSITIVE and supply is recorded as NEGATIVE, and by definition they must equal 0 as supply must equal demand.

The floating exchange rate means the current account total is equal and opposite to the capital and financial account. If you take one list that adds to zero (all the transactions) and break it apart into two lists (irreversible and reversible lists) then if you add those two lists together it must equal zero.