4.6.3—Interdependence between accounts
- Syllabus
- First assessment 2022
- Objective
- 4.6.3
- Level
- HL
A balance in one account can be linked to another
A current-account deficit can be financed by borrowing from abroad or selling domestic assets, while a surplus can fund investment abroad or add to reserves. The accounts are interdependent because the external position changes both spending flows and the claims held by foreigners.
The same financing flow can have different implications: foreign direct investment may build productive capacity, whereas short-term portfolio flows can reverse quickly. Trace the identity first, then evaluate sustainability.