Why Current and Capital Accounts Net Out

[@fungdom]

Of all the explanations I've seen about why the current account and the capital account add up to zero, this is the first one that has made sense. The net change in official foreign reserves is the key. Excellent work.

[@tedlu2502]

completely agree

[@n3367]

Sal, you are one of the best things this world has produced :)

[@Canuckish]

Sal Kahn is the freakin' man.

[@daryltang4014]

Sal Khan > Shao Khan

[@user55book]

this video explains how these accounts balance but doesn't explain why they have to

[@eff700]

you seem be to posting this in perfect order to match my economics course... THANK YOU!

[@VidyaranyaSaiNuthalapatiNSV]

Towards the end of the video, is it not that the change in foreign reserves should be a positive value as US is getting dollars??

[@soutrikgun9133]

I guess I'm lil too late. But to keep the export rates in check the benefitted country will shed the surplus by buying equivalent foreign money.

[@neilmenon8943]

@@soutrikgun9133 still doesn't make sense

[@BhaveshKumar-my2sx]

​@@neilmenon8943 Why? What's now?

[@Howard2006]

This is very helpful to understand on a high level current account and capital accounts having to net out at zero. The current discussion about US tariffs imply that US consumers buy less foreign goods and less transfer in capital accounts. Who knows if that is true or not?

[@niksmith7992]

First.. you save my ass in my anatomy class.. and now you're rescuing me in Accounting. Quite frankly... YOU ROCK!

[@sidyaking]

its debit and credit. The nightmare of any accounting:) Basically just remember: negative change in reserves = surplus = good. Positive change = deficit = not good.

[@bl4cklotus91]

I think I basically understand why the two accounts should theoretically net out in this case, where the current account deficit is smaller than the narrow definition of the capital account (more Dollars flow into the U.S. than flow out, so that difference has to be met by foreign reserves). But what if it is the other way round (like in the initial videos to the Current and Capital accounts with U.S. data from 2011)? If less Dollars enter the U.S. than leave it (current account deficit > narrow definition of capital account), who would balance out that difference and why? Edit: Great videos though on the whole B.o.P topic. Helped me understand the matter a lot better!

[@aesthetics9481]

Why did we subtract that foreign reserves..why didnot we add it? When we are getting it in actual

[@kingtonlam9425]

Why does Current and Captial accounts have to equal? Can't is be different?

[@shubhroparnohalder2495]

Why is Net Change in Official Foreign Reserves a negative value when it is an influx for the US economy?

[@carlosnc114]

Shubhroparno Halder same question

[@erickrajan7401]

You have to think of the US cash in the foreign reserves as a US owned asset. The capital account records positive when US sells an asset and negative when they buy it. Although we are getting an inflow of the cash asset,we are paying for it hence it is a negative value.

[@ibrahim9296]

Sal, one thing i don't understand in the whole economics playlists is indifference curves. You don't seem to have posted a video on intuition on it

[@arunkumarvikram]

In Capital account minus sign means the domestic country(here US) is gaining assets.

[@patrickbateman55]

As a laymen, this part of the video was quite frustrating. What does the US central bank have anything to do with foreign central banks depleting their foreign currency (US dollar) reserves? Sounds like this is a one way transfer of dollars from abroad. What do you mean when you say there was a decline of US dollar reserves? Are you saying the the US central bank keeps US dollars as foreign reserves, and the supply of these dollars had been decreased? I wish the professor did a better job.

[@mre5807]

I do not get why the BoP has to balance - I'm pretty confused. For instance, let's say NX are positive; that means there is money coming into the economy via Exports (more so than has left through Imports). Why not just spend that money on stuff in our economy? Why does it have to back out through the Capital Account?

[@joaolima7356]

Mr E I have the exact same doubt

[@fggf745]

Mr E If U.S. NX are positive (meaning the current account is in surplus), why does the capital account have to be in deficit (meaning U.S. purchase of foreign assets is greater than foreign purchase of U.S. assets)? If the U.S. is exporting more, that means other nations need to pay the U.S. Where on earth can these foreign nations get the money to pay the U.S. for these exports? Well... they can take some out of reserves... but usually this number is so small that we can assume its negligible. It turns out that foreigners gain this cash when U.S. citizens buy foreign assets because the U.S. citizens put U.S. dollars in foreigners hands in exchange for assets. The opposite effect occurs when foreigners buy U.S. assets, they loose cash here. So more U.S. citizens must be giving foreigners cash than foreigners loosing cash in exchange for assets. Thus the capital account must show a deficit. To recap, if the U.S. is exporting more than it is importing, foreigners must come up with cash. They are getting this cash because U.S. investors are putting it in their hands in exchange for their (the foreigner's) assets. I have the AP Macroeconomics Exam tomorrow afternoon!

[@backooful]

Mr E You don't leave foreign currency in your country , you purchase foreign assets(in this case bonds) so that you can accumulate interest. You can view the interest you would earn as an opportunity cost. Remember, these countries holding foreign reserves have fragile economies and are going to need that money for a rainy day to buy imports or else the residents could starve, look at the fall in Russian oil exports for example.

[@lucasluzzi]

+Joe Connolly Can't the foreign importes just trade currencys with US residents to buy? Or is foreign currency considered asset since they are probably buying treasury bonds (of foreign government) with it?

[@Beef_the_Student]

because the money you got from exports is in foreign currencies. You have to either use them to buy dollars to be able to spend at home, or use them to buy other foreign goods.

[@kwii22789]

I always have to watch kahnacademy at 2x speed or i fall asleep

[@MrRobots100]

thanks

[@mingdianli7802]

Haha I normally play at 1.5x speed

[@aastha4641]

I don’t understand 😭 why are official reserves negative , also why is us purchase of foreign assets in negative terms ?

[@jbl55]

If I understand it correctly, let's take that example. Let's say the BCE has dollar in reserve and wants to sell a part of it against Euro to purchase French sovereign bonds, this is equivalent to be an american with dollars on his account and coming in Europe to buy a house, he has to sell a part of his dollars against euros to purchase the house. In both situations dollars were sold to purchase a foreign asset denominated in foreign currency so they should have the same sign.

[@MultiCheeseGrater]

how does this work when the u.s pay with foreign money on exports as well when the us buys foreign assets with foreign money???

[@bozokluoglu_]

To get foreign money US needs to outflow its own dollars, you don't get foreign money for free. In this case if i am not wrong it should be considered among the US purchase of foreign assets.

[@MissyCuteBear]

what’s the difference between net investment income from the current account and the narrow definition of the capital account?

[@yimindeng8721]

Thank you so much for this video!

[@michaelobrien5910]

How does it all start? For foreign countries to hold US reserves, they had to have an imbalance where USD went their way to pay for stuff. If Canada holds US reserves, is that because they had a trade surplus with the US where they made more stuff and exported it to the US and received USD. The US imported more stuff from Canada and had a trade deficit. They had to pay in CAD. They had to pay in CAD, but what if they didn't have any CAD to start with? Where does it all start?

[@patrickbateman55]

There is a negative transaction in official reserves when the domestic central banks pays for more foreign currency (paying in dollars) then they are selling to other central banks (to receive dollars), right?

[@menphis0909]

It would be extremely helpful if khanacademy did a video that generally reviewed both macro and micro for AP testing :)

[@viktorsivanovs3308]

What if (hypothetically) the Fed just prints money to finance the trade account deficit, and then this money ends up in the reserves of the foreign central banks, how would this be reflected in the Balance of Payments? The change in the official reserves would then reflect this?

[@eff700]

Thank you, keeps up the good work, we all love you

[@ROFLM0NSTER]

hey sal could you possibly do one of these on economies of scale

[@yassinewaterlaw6597]

Its possible for USA to have deficit in both accounts and here an example : Lets say usa imported from morocco 100$ and exported to morocco 50$ so usa have deficit in current account -50$ and bcz dollar is world currency usa can also buy assets in morocco with dollars lets say 80$ of assets so while morocco didnt buy any assets in usa instead just keep its surplus dollars in a mattress so usa have deficit in both -50 in current and -80 in capital

[@lolcat23]

Should i understand that the US never deals in any other currency than US dollars? Certainly the US has a pretty decent stockpile of different currencies as a currency fluctuation insurance?

[@Frontfootback]

well explained, keep it up Khan Academy

[@justcuriouseye]

$57.4 B is the decline of US dollar reserves. Kindly go to 4:30

[@sidyaking]

and besides you consider your domestic currency, no matter where it is: in your country or anywhere else. The fact is that if they want you to pay with more currency then they need to take it out of reserves.

[@patriciagc8004]

Shouldn't you include the change in liabilities as part of the financial account??

[@brucec43]

They don't always net out. US $$ are often used around the world as alternative currencies and do not return to the US. They are used in the black market and are not counted here, either.

[@smbdcry]

Trade: goods, services... Asset: bonds, stocks, real estate They are two different things to begin with... so how .. why should “current account” be equal to “capital account” ... I’m confused.

[@Dinosaurusrex-i6l]

But what if they money just stayed abroad. Why are they so certain that the dollars abroad will somehow be reinvested?

[@amitdusange]

video is not clear. Are you talking from US perspective or foreign county perspective. you just inter switch in-between towards the end.

[@lolcat23]

which must mean that over time, the us banks, in this case the one who sold the 12.50, must have a pretty decent foreign currency stockpile. Right? which must mean the sellers bank must have an equal(close enough) stockpile of dollars. Which somehow, someday must come back to the states, right?

[@raz0rx]

Sal: What I'm going to do is, I'm just going to fuc....focus on

[@philswift9628]

Lol

[@smbarber4]

nice:)

[@neilmenon8943]

Okay the negative reserve does not make sense.

[@keeran9306]

1:18 or it could be from purchasing weapons of warfare from foreign entities etc.etc.

[@Thegamemakur]

@Chuck Norris My hero!

[@enfadaditus]

be smart

[@StijnHmrAwesome]

Freudian Slip? :P

[@tazam21]

i lost focus after that part lol!

[@tankplank]

Yej!!!!!!!!!!

[@brainlife]

You mouse way too jimpy. I bailed out.

[@giannisstepan1873]

9 ii 0vo