Trade & Open EconomyintermediateConcept explainer
Balance of Payments
Current account, capital account, and why the books always balance.
Definition
The external ledger: the current account (trade, income, transfers) and the financial account (asset flows) sum to zero by construction.
Key equation
CA + FA = 0; CA = S − I (a deficit means investing more than you save)
The intuition
A current-account deficit isn't 'losing', it's importing capital: foreigners fund your investment in exchange for claims on your future. The question is whether the borrowed resources build capacity or fund consumption.
Exam tip
Every transaction enters twice; if asked where a flow goes, find BOTH entries and the accounts balance themselves.
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