Question

If the financial account balance does not exactly offset the current account in balance. Which types of recording brings the balance of payment into balance? and How does direct foreign investment affect both the financial account and the current account over times?

Answer 1

In general the balance of payments must always equal 0. This means that a current account surplus must be matched with a current account deficit and vice verce. Under a situation that the two balances do not cancel each other out, this will mean that an offsetting item is needed to make sure that the sum of the two balances will always be 0 this is a credit or debit item as the case maybe. But in general the balance of payments will always sum to 0 as the current account surplus must be cancelled out by a capital account deficit. Direct foreign investment is mainly a capital account or financial account item. It affects the debit side or credit side of the capital account accordingly whether there is a outflow or an inflow. A foreign direct investment will in general not effect the current account as it is a financial flow. It mainly effects the financial account.