Inconsistency in Econ

Anyone else notice a slight inconsistency when it comes to the balance of payments? some places say there are three main accounts - current, financial, and official reserves. others add in a “capital account”. In CFAI readings, page 552 lists current, financial, and talks about official reserve. Later on, page 579, it mentions in a paragraph this small capital account that wasnt mentioned before. In a practice problem, page 596, #18, it asks to figure out the effects on the BOP with regards to current, financial, and official, never mentioning capital. then, in the solution on page A-44, it adds in the capital account!!! whats the deal?

I emailed Schweser about one of their Qbank questions that I got wrong because of this. The response was that the CFAI text is outdated and inconsistent.

The “capital account” is just the “financial account”. The name was changed (to financial account) about 10 years ago. There are some good things about being old.

my only hangup on this is that in the CFAI textbook example it actually does split up the BOP into FOUR accounts, listing capital account separately… but doesnt mention that in the text…

It has both the capital account and financial account? If so, I would say that is just a mistake.

the problem in the text gives a bunch of cash flows and asks you to divide them up into the groups of the BOP and balance it then the solution has FOUR accounts, current, capital, financial, and reserve account. it puts $0.27mm of “unrequited transfers” into the capital account. if i had to consolidate into the big 3, would this go into current or financial, in your opinion? thanks

mike, I was led to believe by the CFAI curriculum that the capital- and financial accounts are distinct, but are aggregated for reporting purposes. CFAI describes the capital account as typically very small, including items such as foreign aid, debt forgiveness and expropriation losses. Specifically, see p.580 of that volume, these two accounts and “net errors and omissions” are rolled up into the “Capital and Financial Account” Anyway, I agree CFAI could have made this section much more clear. maratikus and I were trying to draw this distinction back in October.,618851,618897#msg-618897

I think that unrequited transfers (which are essentially transfers of money that don’t require some transfer of good or services, such as a foreign worker sending money home) are part of the current account. Further, I would say that in the greater scheme of things they are a nearly insignificant part of the least significant of the three. I would be shocked to see any questions on the CFA exam about unrequited transfers.

hiredguns1 Wrote: ------------------------------------------------------- > CFAI describes the capital account as > typically very small, including items such as > foreign aid, debt forgiveness and expropriation > losses. > Do you know of any source on that other than CFAI readings? That is not my understanding of the world but it might be that nearly everything was renamed “financial account” and I just decided the capital account was so insignificant that it didn’t exist.

Joey, in 2006 I bought a book from CFAI titled Economics private & public choice, 10th edition by James D. Gwartney, et. al. it’s copyrighted in 2003 Its brief discussion of the BOP is consistent with what you’re saying: p.431: “Capital account: The record of transactions with foreigners that involve either (1) the exchange of ownership rights to real or financial assets or (2) the extension of loans.” There’s no mention of a financial account. All the online resources I’ve found also use capital and financial account interchangeably. I’m going to revisit this year’s LII Curriculum to see whether there’s something I’ve missed. If we can’t gain clarity on this pretty soon, I’ll try contacting CFAI to ask WTF they’re talking about.

Okay, so the Balance of Payments and International Investment Position Manual, 6th Ed. (BPM6) March 2007 Draft by the Statistics Department of the IMF summarizes the changes executed in their 5th edition "The fifth edition was published in September 1993, following a long period of development … BPM5 brought about a number of changes in definitions, terminology, and the structure of the accounts, such as the renaming of the capital account to financial account … " Link to PDF (quotes from p.10-11): Okay so this explanation is crystal clear. Now let’s revisit this year’s CFAI curriculum. 2008 CFAI Level II Curriculum, Volume 1: p.578: “To simplify the presentation of a balance of payments, it is useful to consider four component groups of lines: - current account - capital account - financial account - official reserve account” … p.579: " The capital account (KA) section reflects unrequited (or unilateral) transfers corresponding to capital flows entailing no compensation (in the form of goods, services, or assets). These capital transfers are different from current transfers and cover, for example, investment capital given (without future repayment) in favor of poor countries, debt forgiveness, and expropriation losses. It is generally a very small account, whose title is a bit misleading. The financial account (FA) [footnote 15] includes all short-term and long-term capital transactions. The definition in this reading excludes transactions made by the central bank, which will be assigned to the official reserve account. The financial account includes direct investment, portfolio investment, and other investment flows (especially short-term capital). Direct investment is the net amount of direct purchase of companies or real estate made by a resident abroad and by foreigners at home. “Direct” means that the purchase did not go through the capital market and involves some form of control in the foreign company, as opposed to portfolio investment. The purchase (sale) of a foreign company by a resident is treated as debit (credit), because it corresponds to a financial outflow (inflow). The purchase (sale) of a domestic company by a foreign resident is treated as a credit (debit), because it corresponds to a financial inflow (outflow). Portfolio investments correspond to the balance of investments made on financial markets by domestic and foreign investors. “Other investment flows” captures many types of private and official capital flows, including short-term deposits made by foreigners at domestic banks and vice versa. Introducing straightforward notation, the financial account (FA) is the sum of these three items: - Direct investment (DA) - Portfolio investment (PI) - Other investment flows (OI) [footnote 15]: Although the term current account is standard i the balance of payments literature, many terms have been used to refer to the sum of all capital flows, defined here as the “financial account. Hence, the reader should be careful in applying the concept of “financial account” to published balance of payments data. Here we use the IMF terminology adopted in 1993 and applied since 1995 by most countries (see IMF, 1995).” p.580: “Aggregating all these items in the capital and financial account (KFA), we get Capital account (KA), Financial account (FA), Net errors and omissions (NE). The sum of the current account, the capital account, and the financial account is generally called the overall balance (IMF terminology).” Reading 19 is by Bruno Solnik and Dennis McLeavey. International Investments, Fifth Edition, copyright 2004 by Pearson Education. So everything I’ve read besides this year’s CFAI curriculum is consistent with what Joey’s saying, that there was just a name change in 2003 from capital account to financial account. I’m going to step away from this for a bit, but do you know of any other ways we can verify things? Is it worth contacting CFAI and/or Solnik/McLeavey?

On the other hand, I’m not sure I want to be disagreeing with Solnik and McLeavey…

All i want to know is this: if on the test they give a question where you have to calculate the balance of the Financial account, and one of the line items is and unrequited (or unilateral) transfer, do i include it or not in the Financial account balance?

I would include it in current account, but there is just no chance of that question.