Question

Differentiate between balance of trade and current account balance.

Answer 1

The current account does not include the capital account or the financial account. The capital account refers to any and all international capital transfers, including nonfinancial assets. The financial account deals with money related to foreign reserves and private investments in businesses, bonds, stocks and real estate.

Unlike the current account, which is expected to run at a surplus or deficit, a nation's balance of payments should theoretically be zero. If a Greenland national buys a jacket from a Canadian company, then Greenland gains a jacket while Canada gains the equivalent amount of currency. To reach zero, a balancing item is added to the ledger to reflect the value exchange. According to the International Monetary Fund's Balance of Payments Manual, the balance of payment formula, or identity, is summarized as:

Current Account + Financial Account + Capital Account + Balancing Item = 0