Discuss the link between the current account and changes in a country’s net foreign wealth. 1500 words

The countries having economic transaction with the rest of the world prepare periodically their final
accounts with a view to taking stock of their foreign receipts and payment and their assets and liabilities
they arise out of international transactions. This account is known as balance of payments (BOP). BOP
can be defines as a systematic accounting of all economic transactions between the residents of a
country and the other countries during a period of time, usually one year.
For preparing the BOP accounts, economic transaction between a country and the rest of world are
grouped under two
oad categories, viz. cu
ent transactions and capital transactions.
Cu
ent transactions include export and import of goods and services i.e. visible and invisible trade,
unrequited receipts and payments. These transactions changes i.e. increases or decreases the cu
ent
level of consumption of the country or change the cu
ent level of its nominal income, they are flow in
nature. On the other hand, capital transactions include inflows or outflows of capital, these transactions
changes the capital stock of the country and are mostly stock in nature. In accordance with the two
kinds of transactions, BOP accounting is divided into two accounts
1) Cu
ent Account
2) Capital Account
Cu
ent account as a component of balance of payments shows the sum of the balance of trade where
only visible items are recorded i.e. net revenue on exports minus payment made for imports, earning
ose from foreign investment minus payments made to foreign investors and total cash transfer which is
ecorded under unrequited transfers or unrequited items all items other than the items which fall under
alance of trade are considered as invisible items.
The ‘net balance’ of visible trade that is the difference between exports (X) and imports (M) of goods is
known as trade balance. If X > M, it shows trade surplus, and if M > X, it means trade deficit. The sum of
the visible net and invisible net gives the balance on the cu
ent account is called cu
ent account
alance. If sum of the entries in the receivables is greater than that of the payments it shows a cu
ent
account surplus, otherwise it shows a cu
ent account deficit. This cu
ent account balance is
sustainable to the extent that it does not give rise to an unbounded accumulation of net external
liabilities.
The cu
ent account balance is strongly related to the net foreign asset position of a country. The link
etween the cu
ent account balance CA and the change in net foreign asset position B can be written
as follows:
Bt – Bt-1 =CAt + KGt +Et
CAt = TBt + it
AAt-1
– it
LLt-1 …………………………………………………………… (1)
Where KGt is the capital gain...