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Please someone for the love of god help me. I can't find two sources on the internet that don't have conflicting or very difficult to understand information on the balance of payments. I have various questions.

  1. (I know this has been asked on here before but the answers don't help that much) why does the BOP always balance to zero?
  2. Why do some sources say the capital account = financial account and others (including my textbook) lists them as two different items?
  3. Example to help me understand please: If Japan exports a car for €20,000, that would mean a surplus of €20,000 in the current account right? Does that mean a deficit of €20,000 in the capital account? Why?

Here's what I found on investopedia:

Because all the transactions recorded in the balance of payments sum to zero, countries that run large trade deficits (current account deficits), like the United States, 1  must by definition also run large capital account surpluses. This means more capital is flowing into the country than going out, caused by an increase in foreign ownership of domestic assets. A country with a large trade surplus is exporting capital and running a capital account deficit, which means money is flowing out of the country in exchange for increased ownership in foreign assets.

That last part... exporting capital [...] which means money is flowing out of the country ..... ? My economics teacher always taught us that export = money coming into the country?

Also I don't understand how an export would cause an increase in ownership of foreign assets? Once a good is exported, that is sold to another country, consumer in foreign market, wouldn't it be entirely theirs? What's with the domestic ownership?

Please someone help me I'm about to quit school.

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  • $\begingroup$ I believe it was a few years ago that the IMF changed its international accounting system. It now has a 'capital account' that is different from the financial account. I forget what the capital account is, but it's small whereas the financial account is big. Most textbooks don't make this distinction, they just put all money & investment flows into one group. $\endgroup$
    – Daniel
    Commented May 19, 2023 at 12:37

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I think your main issue is a confusion of the term capital. It seems that your sources sometimes refer to 'money transferred' as 'capital transferred', and 'stuff transferred' as e.g. 'goods transferred'. In econonomics, capital is commonly understood as production factors, i.e. cars, machines, houses, but also software or patents. In a finance or business context, capital might be defined differently, which explains a different use of terms in the context of international trade.

For your question, replace the term capital with stuff. Then, it should become clear that if you run a trade deficit, such as the US, there is more stuff entering the country (=import) than leaving the country (=export). Likewise, there is more money leaving the country than entering it. Hence, the current account which counts stuff is negative and the financial account is positive. The balance of payment is zero by definition because any stream of stuff will have a flow of money in the opposite direction.

I agree that the bit on ownership is a little dubious. If a house is sold to a foreign citizen, a domestic asset is owned by a foreigner, but this should not count as an export (but I might be wrong). Maybe one has to interpret the bit as 'increased ownership in assets that are foreign until ownership changes'-

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  • $\begingroup$ thank you for answering! One last question though... the investopedia site at the end of the quote I left mentions an exporting country having more money flowing out of it. What do they mean? Or do they simply mean that the value of the stuff (in money) is leaving the country? Your comment cleared a lot of my confusion though thank you $\endgroup$
    – Daniel Rübenacker
    Commented May 19, 2023 at 11:59
  • $\begingroup$ It's actually a two-step process. First step: Japan exports goods to Europe and "imports" euro. The latter shows up as a deficit in the financial-capital account, because it's an 'import' of an asset. If Japan want to keep that cash, then it stops there. But usually Japan would rather invest the money so Second Step: Japan buys equities in Europe. This is an 'export' of euro and an 'import' of equity investment. Some textbooks combine the two steps, ignore the cash inflow and outflow, and say goods are exported and equity capital is imported. $\endgroup$
    – Daniel
    Commented May 19, 2023 at 12:52
  • $\begingroup$ I thought when countries trade the country buying a GoS will have to pay in the 'sellers' country's currency, so in this case the Yen right? The rest makes total sense thank you $\endgroup$
    – Daniel Rübenacker
    Commented May 19, 2023 at 19:52

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