current account vs financial account

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maratikus

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What’s the difference between current account and financial (capital) account?
My understanding is that current account represents trade balance (exports - imports) and financial account represents (loans and investments). Am I right about that?
 
yes, you’re correct. Current account is the balance of trade (X-M). There’s also a bunch of other stuff that goes in it (foreign aid, interest and dividends), but I don’t think we have to worry about these.
Capital account records economic activity whenever there is a change of ownership of an asset and a foreigner is involved, or a resident buying from foreginers, i.e. the investment flowing in and out of the country.
HTH.
 
maratikus, looks good. In summary:
Current Account is sum of the following
- trade balance
- balance of services
- net income received
- current transfers
Financial Account is sum of the following
- direct investments
- portfolio investment
- other investment flows
Then there’s the Capital Account and Official Reserve Account.
 
Thanks, lola and hiredguns1.
hiredguns1, i thought financial account and capital account are the same. are you saying those are two different accounts?
 
Yes, they’re different, though anyone would concede the name of the Capital Account can be misleading. It’s typically very small and would include items such as foreign aid, debt forgiveness and expropriation losses.
 
It seems like for CFA purposes they are one though:
http://en.wikipedia.org/wiki/Capital_account
Schweser also equates capital account and financial account. According to Schweser there are three accounts:
Current account + Financial (capital) account + official reserve account = 0
 
maratikus, let’s draw a fine distinction. My understanding is that they’re unique accounts, but as you’re saying, it appears they’re aggregated for reporting.
On p.578 of 2008 LII CFAI Volume 1, it states “To simplify the presentation of the balance of payments, it is useful to consider four component groups of lines:
- current account
- capital account
- financial account
- official reserve account”
On p.580 of 2008 LII CFAI Volume 1, it shows how the capital account, financial account and net errors and omissions are aggregated to form the “Capital and Financial account”
So, all I’m advocating is that the terms shouldn’t be used interchangeably. Anyway, if I’m mistaken, then the CFAI volumes are completely misleading and I’ll mark this as another opportunity for me to tell CFAI to go f- itself.
 
thanks for clarification, hiredguns1. I appreciate your input!
 
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