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Current Account and Capital Account Balance

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Using the simple model of Table 15.12, explain why there is a balance of payments equilibrium when export spending equals import spending. What is the more general condition for equilibrium in the balance of payments?

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The expert explains the balance in international accounts using a hypothetical example.

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A country's balance of payments accounts accounts for its payments to and its receipts from foreigners. Each international transaction enters the accounts twice: once as credit (+) and once as debit (-). It is separated into three broad accounts:
1. current account: for goods and services
2. financial account: flow of financial assets
3. capital account: flow of special category of assets, typically non-produced and non-market, or intangible assets like debt forgiveness.

So if ...

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