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AP® Macroeconomics · Unit 6 · Topic 6.1

Balance of Payments Accounts: Revision Notes (Macroeconomics 6.1)

One-page recap of the balance of payments, the current account and the capital and financial account, credits and debits, and the sign mistakes that cost marks.

Short on time? This page is the recap. For explanations and worked examples, use the full study guide.

Recap

  • The balance of payments (BOP) records all of a country’s international transactions over a period. It has two parts: the current account (CA) and the capital and financial account (CFA).
  • The CA records net exports (the balance of trade), net income from abroad and net unilateral transfers.
  • The CFA records purchases and sales of assets between countries (factories, firms, land, shares, bonds, loans, deposits) and transfers of financial capital.
  • Each account can be in surplus or deficit. A CFA surplus is a net financial capital inflow; a CFA deficit is a net outflow.
  • Total credits = total debits, so CA + CFA = 0.

Key relationships

Relationship Formula or rule Use it to
Balance of trade exports − imports (goods and services) find net exports
Net income from abroad income received from abroad − income paid to foreigners include interest, dividends, profits, wages
Net unilateral transfers transfers received − transfers sent include remittances, aid, gifts
Current account net exports + net income + net transfers find the CA balance
Capital and financial account foreign purchases of domestic assets − domestic purchases of foreign assets find the CFA balance
Balance of payments CA + CFA = 0 find a missing item; check your work

Assumptions behind the numbers

  • All transactions are recorded, so credits equal debits exactly. (Real statistics need a balancing item for errors.)
  • “Domestic” means residents of the country whose accounts you are building, whatever currency they use.
  • Central bank purchases and sales of foreign assets are treated as part of the CFA.

Mistakes to avoid

  1. Calling the balance of trade “the current account”. It is only one part.
  2. Recording a purchase of a foreign asset as a credit. Money leaves: debit.
  3. Putting interest or dividends in the CFA. Income goes in the CA.
  4. Calling remittances exports. They are transfers.
  5. Saying a CFA surplus means lending abroad. It is a net inflow.
  6. Dropping signs. Add signed numbers: deficit (−), surplus (+).

Quick self-check

All figures are fictional, in billions of valdas (VD bn), for Valdoria.

  1. Net exports −15, net income from abroad +4, net unilateral transfers −2. What is the CA? (−13)
  2. The CA is −13. What is the CFA, and is it an inflow or an outflow? (+13, a net inflow)
  3. A Valdorian investor buys a flat in Kestria. Which account, credit or debit? (CFA, debit)
  4. The investor later receives rent from the flat. Which account? (CA, net income from abroad, credit)

Next: practice questions.

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