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    Hi guys, my text book says that the current account has to balance, i.e. inflows = outflows. I don't see the reasoning why this has to happen.
    Thanks =)
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    I thought it was that the complete balance of payments that had to balance overall, and not the current account. Like you could have a current account deficit, but the capital account would be in surplus? Perhaps a clarification by other posters would help. I think BoP is made of the current acc, the capital acc, and then net errors and ommissions.
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    The current account itself does not have to balance. You can have a current account surplus in countries like China and a huge current account deficit in places like the U.S. It's the overall BOP that needs to be balanced.

    Think of it this way. Take the US for example. In order to finance its large current account deficit, it needs money from somewhere (that's probably not going to be from the domestic taxpayers). A financial account surplus (capital account if you'd like) helps fund this deficit.
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    (Original post by Hi, How are you ?)
    Hi guys, my text book says that the current account has to balance, i.e. inflows = outflows. I don't see the reasoning why this has to happen.
    Thanks =)
    Not the current account.

    The balance of payment is made up of 3 different accounts.
    Current account - deals with transfer of good and services and income and current transfers.
    Capital account and financial account - this account is associated with the flow of money.

    For the balance of payment to balance of course X must equal to M

    Remember that there is no such thing as balance of payment deficit because it must balance over time.

    However the BOP can still balance if M>X if the country is using borrowed foreign money to develop its economy.
    Or when X>M and the country is investing the money abroad in order to increased M in the future.
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    (Original post by dan94adibi)
    Not the current account.

    The balance of payment is made up of 3 different accounts.
    Current account - deals with transfer of good and services and income and current transfers.
    Capital account and financial account - this account is associated with the flow of money.

    For the balance of payment to balance of course X must equal to M

    Remember that there is no such thing as balance of payment deficit because it must balance over time.

    However the BOP can still balance if M>X if the country is using borrowed foreign money to develop its economy.
    Or when X>M and the country is investing the money abroad in order to increased M in the future.
    My teacher said that in the long run, the current account needs to balance so that trade between countries is possible as if a country is in a current account deficit, it would probably reduce imports, not benefiting any current due the current account not balancing, for example.
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    (Original post by Hi, How are you ?)
    My teacher said that in the long run, the current account needs to balance so that trade between countries is possible as if a country is in a current account deficit, it would probably reduce imports, not benefiting any current due the current account not balancing, for example.
    This is not true at all.
    Just have a look at the UK's current account.
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