<p>Take a country like Uganda, a net importer. Let's say that the government borrows foreign capital to finance a dam construction. Using the funds, it pays for construction materials, most of which are probably imported; it pays for the design of the dam, the architects and specialists are foreigners; construction companies purchase fixed capital stock (trucks, cranes, etc), most of which are imported, and builders and workers receive wages and they spend most of their income on consumption of imported goods.
Hope this helps.</p>

CC BY-SA 4.0
2019-12-24T21:16:07.737Z
Sure, but that is not necessary. A government can borrow internationally to pay it's own domestic workers.
ChinG
CC BY-SA 4.0
2019-12-24T22:28:07.937Z
so that the workers pay for imported goods. So, essentially the imports are being financed by external funding.
london
CC BY-SA 4.0
2019-12-24T22:51:45.593Z
Sorry for beating on a dead horse, but that is not necessary though, right? Workers could pay for domestic consumption just as well?
ChinG
CC BY-SA 4.0
2019-12-25T20:06:32.653Z
yes certainly. But, much of consumption goods are imported in net exporting countries. Take a look at this https://wits.worldbank.org/CountryProfile/en/Country/UGA/Year/LTST/TradeFlow/EXPIMP/Partner/WLD/Product/All-Groups
london
CC BY-SA 4.0
2019-12-24T18:20:52.583Z
2019-12-24T18:20:52.583Z
london
<p>We know from the balance of payments identity that:
<span class="math-container">$$
BOP=CA+KA+FA=0
$$</span>
 where <span class="math-container">$CA$</span> is current account, <span class="math-container">$FA$</span> is financial account, and <span class="math-container">$KA$</span>
is capital account. The BOP is an identity that always balances. Although
in some cases, the intuition is quite clear how this happens, it is
not always transparent. Specifically, there are a few types of external
financing that take place: bond finance, FDI, portfolio investment
and government foreign bank borrowing. Note that these will show up
as a + in the Financial Account. Imagine then that these funds are
used to fund domestic purchases (building a damn, building an office
etc). These are technically inflows of external capital that are funding
domestic purchases, and hence not imports. I wonder then, how do these
activities balance out mechanically in the BOP? In other words, how
are capital inflows that go towards financing domestic consumption
balanced out in the BOP? Thanks!</p>

<international-trade>
Balance of Payments and Capital Inflows
ChinG
# Balance of Payments and Capital Inflows

(Asked by: username_0 on 2019-12-24)

We know from the balance of payments identity that:
$$
BOP=CA+KA+FA=0
$$
where $CA$ is current account, $FA$ is financial account, and $KA$
is capital account. The BOP is an identity that always balances. Although
in some cases, the intuition is quite clear how this happens, it is
not always transparent. Specifically, there are a few types of external
financing that take place: bond finance, FDI, portfolio investment
and government foreign bank borrowing. Note that these will show up
as a + in the Financial Account. Imagine then that these funds are
used to fund domestic purchases (building a damn, building an office
etc). These are technically inflows of external capital that are funding
domestic purchases, and hence not imports. I wonder then, how do these
activities balance out mechanically in the BOP? In other words, how
are capital inflows that go towards financing domestic consumption
balanced out in the BOP? Thanks!

**Tags:** international-trade

---

## 1 answers

### Answer by username_1 on 2019-12-24. Score: 1 | Accepted answer

Take a country like Uganda, a net importer. Let's say that the government borrows foreign capital to finance a dam construction. Using the funds, it pays for construction materials, most of which are probably imported; it pays for the design of the dam, the architects and specialists are foreigners; construction companies purchase fixed capital stock (trucks, cranes, etc), most of which are imported, and builders and workers receive wages and they spend most of their income on consumption of imported goods.
Hope this helps.

> **Comments:**
> **username_0**: Sure, but that is not necessary. A government can borrow internationally to pay it's own domestic workers.  
> **username_1**: so that the workers pay for imported goods. So, essentially the imports are being financed by external funding.  
> **username_0**: Sorry for beating on a dead horse, but that is not necessary though, right? Workers could pay for domestic consumption just as well?  
> **username_1**: yes certainly. But, much of consumption goods are imported in net exporting countries. Take a look at this https://wits.worldbank.org/CountryProfile/en/Country/UGA/Year/LTST/TradeFlow/EXPIMP/Partner/WLD/Product/All-Groups  

---

