What Is a Current Account Balance?

The capital-financial account balance refers to the aggregated balance of foreign capital inflows and outflows and financial transactions in a given period of time in the country, and reflects the balance between the domestic capital inflows and outflows and financial product transnational transactions. When the difference is positive, it indicates that the country's capital and financial resources inflow is greater than the net surplus of the outflow; on the contrary, when the difference is negative, the country's capital and financial resources outflow is greater than the net deficit of the inflow.

Capital and financial account balances

Right!

The capital-financial account balance refers to the aggregated balance of foreign capital inflows and outflows and financial transactions in a given period of time in the country, and reflects the balance between the domestic capital inflows and outflows and financial product transnational transactions. When the difference is positive, it indicates that the country's capital and financial resources inflow is greater than the net surplus of the outflow; on the contrary, when the difference is negative, the country's capital and financial resources outflow is greater than the net deficit of the inflow.

Chinese name

Capital and financial account balances

Types of

difference

Definition

Aggregate balance of income and expenditure

Affiliation

enterprise

First, from the balance of capital and financial accounts, we can see the degree of openness of a country's capital market and the degree of development of financial markets, which can provide a useful reference for the adjustment of a country's monetary policy and exchange rate policy. Generally speaking, the total flow of capital and financial accounts in countries with open capital markets is large. Because countries have large differences in interest rates, the maturity of financial markets, the degree of domestic economic development, and the stability of currency values, capital and financial account balances tend to fluctuate greatly. It is very important to keep this balance at zero. difficult. ^[1]

Under the double-entry bookkeeping method, when errors and omissions are not considered, the current account balance inevitably causes the same amount of capital and financial account balance in the opposite direction. We can express the relationship between these two accounts with the following formula: ^[2]

CA + KA = 0

In the formula: CA is the current account balance; KA is the capital and financial account balance.

When the current account is in surplus, the capital and financial accounts are in the same amount, resulting in capital outflows, and the country s foreign net assets increase. When the current account is in deficit, the capital and financial accounts are in the same amount, with capital inflows, and external assets decreasing or liabilities increasing. We call the latter the capital and financial account as a current account financing mechanism. The existence of this financing mechanism allows the current account deficit to exist within a certain period of time. According to financing sources, financing methods can be divided into two types: one is to reduce the reserve assets of the domestic government to finance the current account deficit; and the other is to finance the current account deficit through the inflow of foreign capital in the form of direct investment, securities investment or other investments . But either way has certain restrictions, and it is impossible to maintain the current account deficit for a long time.