How do the balance of payments accounts record a country's transactions with the world?
Topic 6.1 Balance of Payments Accounts: describe the current account and the capital (financial) account, and explain why the two must offset each other.
A focused answer to AP Macroeconomics Topic 6.1, covering the balance of payments, the current account and the capital (financial) account, what each records, and why the two accounts must offset so the overall balance is zero, with a worked classification question.
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What this topic is asking
Topic 6.1 opens Unit 6, the open economy, with the balance of payments: the record of a country's transactions with the rest of the world. The College Board wants you to describe the current account and the capital (financial) account, classify transactions, and explain why the two offset each other.
The two accounts
By convention, an inflow of payment (such as an export sold abroad) is a credit, and an outflow (such as an import bought from abroad) is a debit.
Why the accounts offset
So a current account deficit is financed by a capital account surplus (net foreign capital inflows), and a current account surplus is matched by a capital account deficit (net capital outflows). The money a country sends abroad to buy imports comes back as foreign purchases of its assets.
Try this
Q1. In which account is the import of a foreign good recorded? [1 point]
- Cue. The current account (as a debit).
Q2. A country runs a current account surplus. What must its capital account show? [1 point]
- Cue. A capital (financial) account deficit of the same size (net capital outflow); the two offset.
Exam-style practice questions
Practice questions written in the style of College Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AP 2018 (style)1 marksMultiple choice. A country's purchase of foreign-made cars would be recorded in the balance of payments as a (A) credit in the current account. (B) debit in the current account. (C) credit in the capital account. (D) debit in the capital account. (E) transfer payment.Show worked answer →
The answer is (B). Imports of goods (foreign-made cars) are recorded as a debit (an outflow of payment) in the current account, because the country is paying foreigners for goods.
(A) would be an export. (C) and (D) are financial flows (buying or selling assets), not goods. (E) is unrelated. An import of goods is a current-account debit, so (B).
AP 2021 (style)4 marksFree response. (a) Name the two main accounts in the balance of payments. (b) State one type of transaction recorded in each. (c) Explain why the current account and the capital (financial) account must offset each other. (d) If a country runs a current account deficit, what must be true of its capital account?Show worked answer →
A 4-point explanation FRQ.
(a) Accounts (1 point): the current account and the capital (financial) account.
(b) Transactions (1 point): current account, exports and imports of goods and services, income, and transfers; capital (financial) account, purchases and sales of financial and real assets across borders.
(c) Offset (1 point): every international transaction has two sides; money paid out in one account returns as an inflow in the other, so the accounts must offset and the overall balance of payments sums to zero (abstracting from official reserves and errors).
(d) Current account deficit (1 point): the capital (financial) account must be in surplus by the same amount, that is, the country is a net recipient of foreign capital inflows.
Markers reward naming both accounts, a valid transaction for each, the offsetting logic, and the capital-surplus answer.
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Sources & how we know this
- AP Macroeconomics Course and Exam Description — College Board (2023)