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Main causes and consequences of financial account deficit



Table of Content
1 Balance of payment.............................................................................................................. 2
2 Current account and financial account deficit ..................................................................... 2
3 Large current account deficit and government concern ....................................................... 5
4 Conclusion ........................................................................................................................... 6
Reference.................................................................................................................................... 7
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Topic: What is balance of payments? Explain what are the main causes and consequences
of current account and financial account deficit. Should the governments worry about
large current account deficit?
1 Balance of payment
The definition of the BOP (Balance of Payment) is the tactic countries employ for the
monitoring of the whole global monetary dealings at a particular duration of time. Normally, the
calculation of the BOP is on quarterly basis and as per calendar year. The whole trading done by
the private as well as public sectors is comprised of in the BOP so as to decide how much the
cash flow of a country is flowing in and out. In case of money receipt, this is called a credit, and
in case of being paid or given money, the dealing is called a debit to a country. Hypothetically,
the BOP must be nil, that is to say that properties (credits) and responsibilities (debits) must be in
balance, yet in reality this case seems to be very rare. Therefore, the observer can come to the
conclusion from the BOP if a country is facing a deficit or a surplus and from where of the
economy the defects are rooting (Chipman, 1984; Bussire, 2013). There happens to be three
chief types of BOP: the current account, the capital account and the financial account. Within
such three types happen to be sub-divisions, each of which comprises of a various kind of global
monetary dealing.
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2 Conclusion
This study has first introduced the basic concept of balance of payment, current account and
financial account deficit. The next part, it provided the discussion on why should current account
deficit be concerned by the government.
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Reference
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stability, and monetary policy: Reflections on a gripping episode. IKTISAT ISLETME VE
FINANS, 27(315), 93-119.
Backus, D., Henriksen, E., Lambert, F., & Telmer, C. (2009). Current account fact and fiction
(No. w15525). National Bureau of Economic Research.
Bertaut, C. C., Kamin, S. B., & Thomas, C. P. (2009). How Long Can the Unsustainable US
Current Account Deficit Be Sustained&quest. IMF Staff Papers, 56(3), 596-632.
Blanchard, O. J., & Milesi-Ferretti, G. A. (2011). (Why) Should Current Account Balances Be
Reduced?International Monetary Fund
Bussire, M. (2013). Balance of payment crises in emerging markets: how early were the
earlywarning signals?. Applied Economics, 45(12), 1601-1623.
Chipman, J. S. (1984). Balance of Payment Theory. Economic Analysis in Historical
Perspective, d. J. Creedy & DP O'Brien, Butterworths, Londres.