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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
Step 2 of 26
The real wordsTheory

Salvatore's definitions

Balance of paymentsa summary statement of the international transactions of a nation for a specified period of time.
International transactionthe exchange of a good, service or asset between residents of one nation and residents of another.

The purpose is stated plainly on the slide: to help the government in formulating monetary, fiscal and trade policies. Learn that clause; it is a one-mark question on its own.

The student's note adds that some entries involve no foreign resident directly, for instance a central bank selling its foreign currency holdings to commercial banks.

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