APMacro: Imbalance of Payments

There are three accounts within the balance of payments: current, capital and official transactions or reserve accounts. Market transactions determine the first two; the third is an offsetting account the government controls. In the absence of any governmental or central bank intervention, the current account balance and the capital account balance must sum to zero. If a nation imports more than it exports, a surplus in the capital account must necessarily offset the deficit because, by definition, goods must either be paid for or the payment is owed. The foreign currency used to buy imports had to come from somewhere, in addition to currency earned from exports; and in this situation, only a capital account surplus could supply the needed foreign currency.



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