when recorded in a country s balance of payments nonresidents claims made on residents financial assets are liabilities while claims made against nonresidents by residents are assets 1
understanding financial accountsthe financial account is a tracking mechanism for shifts in international asset ownership and it is composed of two subaccounts to compare how the financial account can increase or decrease let s analyze the following scenarios for the financial account of the united states 2capital account vs current accountthe financial account differs from the capital account in that the capital account records transfers of capital assets transactions in the capital account have no impact on a country s production levels rate of savings or overall income 3the current account reflects the country s current trade balance combined with net income and direct payments and measures the import and export of goods and services when combined with the financial and capital accounts the three accounts form a country s balance of payments transaction recordingthe financial account involves financial assets such as gold currency derivatives special drawing rights equities and bonds during a complex transaction containing capital assets and financial claims a country may record part of a transaction in its capital account and the other part in its current account in addition because entries in the financial account are net entries that offset credits with debits they may not appear in a country s balance of payments even if transactions occur between residents and nonresidents risks and benefits of increased accesseasing access to a country s capital is considered part of a broader movement toward economic liberalization and a more liberalized financial account opens a country up to capital markets however reducing restrictions on the financial account has risks the more a country s economy is integrated with other economies worldwide the greater the likelihood that economic troubles abroad will affect the domestic situation this potential outcome is weighed against the potential benefits lower funding costs access to global capital markets and increased efficiency 