Unit 5 Introduction to International Policy Flashcards
What is counted as CFA (The Capital and Financial Account)
Yes:
- Foreign agents investing in our national assets
- Foreign agents buying national stock and bonds
- Loans from exterior, foreigners saving in national bank accounts or trade credit owed to our country
No:
- National agents investing in foreign assets
- National agents buying foreign stock and bonds
- Loans from our country to others, national agents saving in foreign bank accounts
Identity between the capital and financial account (CFA) and the current account (CA)
CA = -CFA or CFA + CA = 0
This is an accounting identity (according to the principle of double-entry bookkeeping) that ensures the overall balance of payments is zero
Current Account surplus
Positive CA (negative CFA): we are saving more than investing nationally. So, we are putting the remaining savings into investment on the rest of the world
Therefore, parties like “national agents investing in foreign assets or buying foreign stock and bonds” (which entre th CFA negatively) are going to weight more. The CFA will be negative. So -CFA > 0 and will reflect CA.
Pros: sign of developed and economically stable country with production efficient enough to export and sufficient foreign reserves. More work opportunities (through export sector)
Cons: Depending on foreign demand and on debt being repaid
Current account deficit
Current Account (CA): The current account is a component of a country’s balance of payments. When a country’s expenses on these items exceed its earnings, it’s said to have a current account deficit.
= Negative CA (Positive CFA): We are investing more than saving nationally. The investment not covered by our own savings is hence being finances by the rest of the world.
Thus parties like “foreign agents investing in national assets or buying national stock and bonds” (which enter the CFA positively) are going to weight more. The CFA will be positive. So - CFA < 0 and will reflect CA
Pros: Useful for emerging countries that have growth potential but not enough national savings to take off. More variety (through imports)
Cons: debt accumulation
Current account definition
Current Account (CA): The current account is a component of a country’s balance of payments. It includes transactions like trade (exports and imports of goods and services), income from abroad, and current transfers.
Capital and Financial Account definition
Capital and Financial Account (CFA): This is another part of the balance of payments, which records all transactions involving the purchase and sale of assets. These assets can be stocks, bonds, or real estate. The CFA typically moves inversely to the CA.
