What is the definition of a financial account?
In macroeconomics, a financial account is a part of a country’s balance of payments dedicated to nonresident claims and liabilities, especially financial assets. Financial account components include direct investment, portfolio investment, and sector-specific reserve assets.
In a country’s balance of payments, nonresident claims on residents’ assets are liabilities, whereas resident claims against nonresidents are assets.
Financial Accounting Overview
It tracks changes in international asset ownership and consists of two subaccounts.
- The first subaccount comprises domestic ownership of international assets such as bank deposits and securities in foreign corporations.
- Foreign ownership of domestic assets, such as government bonds or loans to domestic banks, is included in the second subaccount.
Let’s examine the following US financial account situations to evaluate how they might rise or fall:
- Increases in U.S.-owned foreign assets overseas are financial outflows that lower the U.S.’s financial account.
- Instead, a decline in U.S.-owned foreign assets overseas is a financial inflow that boosts the financial account.
- Increases in foreign-owned assets in the U.S. are financial inflows that boost the country’s financial account.
- Decreases in foreign-owned assets in the U.S. are financial outflows that lower the country’s economic record.
Current vs. Capital Account
Unlike the financial account, the capital account documents transactions involving capital assets. Capital account transactions do not affect a country’s productivity, savings, or revenue.3
The current account analyzes the country’s trade balance, net income, and direct payments, including imports and exports of commodities and services. These three accounts and financial and capital accounts comprise a country’s balance of payments.
Recording transactions
Investments in the financial record include gold, currencies, derivatives, special drawing rights, shares, and bonds. A country may record part of a complex transaction with capital assets and financial claims in its capital account and the other half in its current account.
Financial record entries are net entries that counterbalance credits with debits; thus, they may not appear in a country’s balance of payments, even if residents and nonresidents trade.
Increased Access Risks and Benefits
Liberalizing a country’s financial record allows more access to capital markets, contributing to economic liberalization.
However, easing financial account regulations has hazards. The stronger a country’s economic integration with global economies, the more likely issues overseas may impact home conditions. This outcome is compared to the benefits of decreased finance costs, global capital market access, and enhanced efficiency.
Financial account balances consist of what?
It includes net direct investments, net portfolio investments, asset funding, and errors and omissions.
What are current and financial accounts?
The current account measures trade between the U.S. and foreign countries. It tracks a country’s foreign asset ownership.
Is the financial account always balanced?
The capital and finance accounts counterbalance the current account. Thus, the balance of payments goes to zero.
Final Remarks
A nation’s balance of payments includes financial accounts with gold, shares, bonds, derivatives, and special drawing rights for nonresident claims and obligations. Financial accounts track foreign asset ownership movements.
Conclusion
- A financial account is a part of a country’s balance of payments that covers claims or liabilities to nonresidents about financial assets.
- Financial account components include direct investment, portfolio investment, and sector-specific reserve assets.
- Assets in the financial account include gold, currencies, derivatives, special drawing rights, shares, and bonds.
