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