Current account - Capital account

CFA Level I
#1

Hi, If a country currently has an account dificit, it is said that it must have an inflow of foreign capital , creating a surplus in the capital account. 1) Why is this?

  1. Is the inflow of foreing capital included in the Investment part of the (X-M) = (S+I) + (G-T) equality? Thanks
#2

Deficit/Surplus on one account must be offset on another account so balance of payments would be balanced.

Deficit on current account must be financed with surplus on financial account.

#3

Thanks. I got that but trying to fit this into the equality. current account = X-M Capital account = ? Financial account = ?

#4

Well, I am not expert for Macroeconomy, but regarding mentioned above:

CA - = FA +

then would be

(X-M) = Foreign I (FDI) or/and foreign debt inflow

#5

The way it is eplained is that it is assumed in (X-M), X represents export of capital and M represents import of capital, hence deficit implies M>X and therefore there is import of capital. The investment part in the mentioned equality refers to domestic private investment. Also as Flashback said deficit on one account must be financed with surplus on another account, so the equality you might be looking for is: Current a/c + Financial a/c + Capital a/c = 0