<p>The balance of payments identity states that the current account and financial account sum to zero: if you have a current account deficit, you have a financial account surplus. This identity comes directly from the simple accounting principle of double-entry bookkeeping, whereby each transaction show up in the balance of payments as a debit and as a credit. A financial account surplus means that you have
positive &quot;net exports&quot; in assets: you are issuing new debt to foreigners and/or reducing your holdings of foreign assets, both of which reduce your net foreign assets.</p>
<p>By way of example, when Canada imports an F-150 truck from the US, that reduces Canada's trade balance and shows up in the current account as a debit. But that is only half of the story, as you have to pay for the truck. Whether you pay cash or take out a loan from Ford US, that shows up as a credit in the financial account and reduces your net foreign assets.</p>

CC BY-SA 4.0
2021-06-04T23:06:28.260Z
"Whether you pay cash or take out a loan from Ford US, that shows up as a credit in the financial account and reduces your net foreign assets." Sorry but I dont quite follow. If you pay for it in cash how are you reducing your net foreign assets exactly? You're just giving them cash, not giving them assets...?
Sam
CC BY-SA 4.0
2021-06-04T12:54:59.443Z
2021-06-04T12:54:59.443Z
j steinberg
<p>My book states a higher CAD necessarily increases net foreign debt/net foreign equity, and I'm a bit confused by this assertion.
See, I can understand how a higher current account deficit may sometimes be due to higher deficits in net primary incomes, which would signal increased dependence on foreign capital, which would increase net foreign debt. HOWEVER, a CAD could be caused by higher deficits in the goods and services sub-account - this in itself wouldn't cause the net foreign debt/equity to increase as theres no lending of capital going on, just the purchase of imports (right?). So this contradicts the book's assertion that CAD raises NFD/NFE always... can someone please clear up the confusion here? Thanks.</p>

<balance-of-payments>
Does a high current account deficit ALWAYS have to increase net foreign debt/equity?
Sam
# Does a high current account deficit ALWAYS have to increase net foreign debt/equity?

(Asked by: username_0 on 2021-06-04)

My book states a higher CAD necessarily increases net foreign debt/net foreign equity, and I'm a bit confused by this assertion.
See, I can understand how a higher current account deficit may sometimes be due to higher deficits in net primary incomes, which would signal increased dependence on foreign capital, which would increase net foreign debt. HOWEVER, a CAD could be caused by higher deficits in the goods and services sub-account - this in itself wouldn't cause the net foreign debt/equity to increase as theres no lending of capital going on, just the purchase of imports (right?). So this contradicts the book's assertion that CAD raises NFD/NFE always... can someone please clear up the confusion here? Thanks.

**Tags:** balance-of-payments

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## 1 answers

### Answer by username_1 on 2021-06-04. Score: 1

The balance of payments identity states that the current account and financial account sum to zero: if you have a current account deficit, you have a financial account surplus. This identity comes directly from the simple accounting principle of double-entry bookkeeping, whereby each transaction show up in the balance of payments as a debit and as a credit. A financial account surplus means that you have
positive "net exports" in assets: you are issuing new debt to foreigners and/or reducing your holdings of foreign assets, both of which reduce your net foreign assets.

By way of example, when Canada imports an F-150 truck from the US, that reduces Canada's trade balance and shows up in the current account as a debit. But that is only half of the story, as you have to pay for the truck. Whether you pay cash or take out a loan from Ford US, that shows up as a credit in the financial account and reduces your net foreign assets.

> **Comments:**
> **username_0**: "Whether you pay cash or take out a loan from Ford US, that shows up as a credit in the financial account and reduces your net foreign assets." Sorry but I dont quite follow. If you pay for it in cash how are you reducing your net foreign assets exactly? You're just giving them cash, not giving them assets...?  

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