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Sem 5 Prep
← Open Economy MacroDouble-entry balance of payments accounting

Formulas for this chapter

Equality of accounts

Current account + capital account = financial account

Given two of the three balances, to find the third. It holds because of double entry, so it is an identity rather than a theory.

Net lending
Credits in the current and capital accounts exceed debits
Net borrowing
Credits in the current and capital accounts fall short of debits

Balance of payments summation

BoP = CAB + KAB + financial account balance (less official reserve transactions, incl. net financial derivatives) + statistical discrepancy

Whenever the question gives three account balances and a discrepancy. Never include official reserve transactions in the financial account figure: those are the answer.

CAB
Current account balance: goods, services, investment income, unilateral transfers
KAB
Capital account balance: debt forgiveness and migrants' assets, in this format
Statistical discrepancy
The residual that closes an imperfectly measured account; errors and omissions in the Indian format

Current account and the national income identity

Current account deficit = (G - T) + (I - S)

Any question asking how a current account deficit can be reduced, or linking the external deficit to the budget deficit. This is the twin-deficit identity that returns in chapter 18.

G - T
Government deficit: spending less taxes
I - S
Private borrowing: investment less private saving
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The ideaTheory

Every deal has two sides

You sell a bicycle for two thousand rupees. Two things happened, not one: a bicycle left, and two thousand rupees arrived.

A shopkeeper who wrote down only the money would have no idea what stock had gone. So bookkeepers write both.

The balance of payments does exactly this for a country. Every transaction is entered twice, once as a credit and once as a debit, which is why the full statement can never fail to add up. That single fact explains most of what looks mysterious in this chapter.

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