Question about Current Account / Capital and Financial Account (1 Viewer)

[eX-Bhai]

I understand that the current account + capital and financial account = 0 .. but the one thing I'm not understanding is why? Can someone please explain why the current account balances the capital and financial account? Thank you in advance =)

 

[Demandred]

Foreign funds has to be borrowed to cover the short fall. .

 

[Rafy]

Think of the flexible E.R system where an equilibrium is determined by market forces. (i.e Demand = Supply)

i'll explain more tommorow when im fully awake.

 

[eX-Bhai]

Foreign funds has to be borrowed to cover the short fall. .

so you're trying to say is that our exports exceeds our imports, and so, we our short fall will equal to the money we borrow?..

consider this example..

if I was to owe a friend 100 dollars... and i only have 90 dollars.. i will turn to the bank to get that remaining 10 dollars right?... but then how does this 100 + -10 = 0.. that is what im confused about

 

[Rafy]

Well as i said it has to do with our floated E.R.

At equilibrium Demand=Supply

The demand for Australian Dollars comes from exports, investment into australia etc etc
Supply from Imports, income debits, and our investment oversea etc etc

look at the accounts and see which one is resulting in an overall demand, and which one a supply.

So under our system, equilibrium will be achieved resulting in the two accounts cancelling each other out.

 

[Demandred]

Yep Rafy is right, but the determination using floating ER is based on some really heavy assumptions.

 

[eX-Bhai]

But what if it is at a disequilibrium?.. and im still kinda lost on why it adds up to 0..

 

[*Ya_So_CuTe*]

I wouldn't stress about it too much. As long as you know that :
Current Account+ Capital and Financial Account + Net Errors and Ommissions= 0
you'll be right. ( Net errors and ommisions taking into account statistical errors)

Although for short answer, multiple choice where this comes up all you need to know are the components of each account so you can work out the equation , which might be in a table etc.
E.G Current account( one way transactions in or out of Australia)
= 1) Balance on goods and service
2)Net Income
3Net Current transfers
Capital & Financial account ( are reversible and deal with financial assets and liabilties)
Capital ( non commerical transactions)
1) when people migrate into or out of Australia permanently
2) cancellation of debts
3)purchase of intellectual property rights. E.G patents, copyrights, franchises, trademarks
4) Foreign aid given for the building of infastructure
FINANCIAL ( commercial transactions)
1) Direct investment
2) Portfolio investment
3) Other investment E.G trade credits, currency
4) Reserve assets

there's some revision done for me !!!

 

[eX-Bhai]

I wouldn't stress about it too much. As long as you know that :
Current Account+ Capital and Financial Account + Net Errors and Ommissions= 0
you'll be right. ( Net errors and ommisions taking into account statistical errors)

Although for short answer, multiple choice where this comes up all you need to know are the components of each account so you can work out the equation , which might be in a table etc.
E.G Current account( one way transactions in or out of Australia)
= 1) Balance on goods and service
2)Net Income
3Net Current transfers
Capital & Financial account ( are reversible and deal with financial assets and liabilties)
Capital ( non commerical transactions)
1) when people migrate into or out of Australia permanently
2) cancellation of debts
3)purchase of intellectual property rights. E.G patents, copyrights, franchises, trademarks
4) Foreign aid given for the building of infastructure
FINANCIAL ( commercial transactions)
1) Direct investment
2) Portfolio investment
3) Other investment E.G trade credits, currency
4) Reserve assets

there's some revision done for me !!!

Thanks for the structure.. but I was more into why the two accounts balance out..