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Current Account and Capital Account

What is factored in?

Balance of Trade

Balance of trade is literally exports minus imports.

Foreign Investments

Net Foreign Factor Income

Let’s say John, an American, goes to Japan and opens a factory. Japanese citizens pay him, and that gives the U.S. money. The sum of all income receipts abroad equals the sum of earnings by all people like John.

Similarly, Rey moves to the U.S. from China and opens an apartment complex. I pay rent to him, and he takes the money back to China. The sum of all income payments equals the sum of all payments to people like Rey.

The income receipts - income payments equals the net foreign factor income.

Unilateral Transfers

This is if I were to give my mom, who lives in France, money.

Capital Account

Capital account refers the the ownership of assets.

This equals the change in foreign-owned assets in the US minus US-owned assets abroad. In this case, Rey’s apartment complex counts as a foreign-owned asset in the US. John’s factory counts as a US-owned asset abroad.

Capital Account Balances out Current Account

If the current account is negative, the capital account is positive. Why is that?

Consider that if the capital account is positive, then the money needed to buy US assets had to come from somewhere. It had to come from the United States, meaning the current account was lending money more than it was borrowing.

When the US has a current account deficit, that just means they’re borrowing money, which will later be used to purchase foreign assets.

Exchange Rates

Automatic Stabilizers