Why does a KAFA surplus lead to a CA deficit? (1 Viewer)

[idontlikeintegrals]

I've seen this question on here before but it doesn't seem to answer my question directly so I thought I'd ask it.
I understand that KAFA + CA = 0 in the BoP, but why exactly does it do this? For instance, if a person borrows money from overseas (FA credit) to buy capital for their business, why would this be a deficit to the CA? I understand in the long run, there will be interest payments (debits to NPY), but say the loan was over 10 years, how would the BoP = 0?

 

[ben_from_econtools]

The Balance of Payments always sums to zero because it uses double-entry accounting: every international transaction records both what Australia receives and what it provides in return. But those two entries do not need to occur in the CA and KAFA. They can occur in one of the accounts.

In BoP accounting, the ABS say to think about it in terms of a credit meaning Australia provides something of economic value to the rest of the world, while a debit means Australia receives something of value. in your example, if an Australian business borrows money from overseas, the financial account records a credit because Australia’s liabilities to foreigners increase (the foreign lender now has a claim on the Australian borrower which is us providing something to them), and a debit because the Australian resident receives a financial asset, such as a bank deposit. Both entries occur in the financial account, so the BoP already balances even before the money is spent.

Now the interest paid on the loan will have two entries as well. The interest payment is recorded as a debit in the current account (primary income) because Australia is paying income to a non-resident for the use of their capital (this is the price we pay to use something from them). At the same time, the payment is made using a financial asset such as money from an Australian bank deposit, which means Australia is providing a financial asset to the rest of the world, so this is recorded as a credit in the financial account (a reduction in Australia’s foreign assets). These two entries offset each other, ensuring the Balance of Payments still sums to zero.

 

[idontlikeintegrals]

Regarding your example from the second paragraph, what does this mean for a domestic firm that is borrowing funds from an overseas lender that aims to use said funds to invest in capital? Would this have an effect on the CA considering you said the BoP has already balanced?

 

[ben_from_econtools]

The current account would only be affected later if the firm uses the funds to import capital equipment. In that case, the import would be recorded as a debit in the current account (goods) because Australia receives goods from overseas, and the offsetting entry would be a credit in the financial account, reflecting the reduction in a financial asset (such as a bank deposit).

 

[.kumori]

@ben_from_econtools can you help me with this question?

 

[.kumori]

nvm its allg now. Someone explained it to me