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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 4 of 26
The real wordsTheory

Debit transactions, the exact mirror

Debit transaction (minus)one that involves a payment to foreign sources.
  1. Imports of goods and services
  2. Unilateral transfers to foreigners
  3. Financial outflows
  4. An increase in the nation's assets abroad
  5. A reduction in foreign assets in the nation

Learn one list and flip every preposition to get the other.

The trap is items 4 and 5. Buying a foreign share increases the nation's assets abroad, so it is a debit, even though it feels like an investment gain.

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