Discuss the link between the current account and changes in a countrys Essay

Discuss the link between the current account and changes in a countrys net foreign wealth - Essay Example Factor Income is the return or income of a particular asset an example of which are the income derived from land or the rent paid by its occupant. Net Transfer Payment is the liability of the government in financing its operation or the difference between the required payments needed to finance social services or other similar government function and the availability of funds coming from the income of the government. Before giving illustrations and meaning to each of the economic phrases, it is imperative to state that the link between the two sides of the equation reflects the Balance of Payments of a country. The Balance of Payment is the record of all the fiscal transaction of a nation with the rest of the world. Balance of Payments ideally should always be zero to ensure that nations are not spending beyond their means or on the opposite side, not hoarding its fiscal resources that could lead to a regional or global financial crisis. Spending beyond a country’s means could result to increasing its local or external debts which would counter-act or zero out its Balance of Payments. An unchecked increase in external and local loans could result to an economic collapse starting with its monetary system after a short duration spiral. The domino-effect would then ensue, affecting inflation for consumer items, interest rates for banks, closure of manufacturing plants dependent on imported raw materials that lead to the loss of jobs. Hoarding, on the other hand, results to the shortage of the amount of money being circulated in the global or regional economy. Since the US dollar is considered as the de facto international currency, the absence of the dollar in international circulation could lead to the collapse of some economy due to the spiralling devaluation of its monetary system against the dollar. The absence of available money for institutional short term loans from international sources could prompt government to look inward to finance its US dollar requirements. The absence of money in circulation on a regional or global economy would result to government controlled banks to lower their interest rates. Rational Expectation Theory would then dictate the momentum. Lower interest rates from government controlled banks translate to lower income for money in the bank which will lead to the exodus of money from the banks to high yield instruments such as bonds and government loans. On the other hand, a Balance of Payment from all countries is indicative of a progressive and healthy world economy. In essence, the amount of goods produced is equal to the goods required by the market, the amount of money in circulation needed to purchase the goods are in the hands of the population transacting for the goods. Net Foreign Asset – as articulated earlier—is the net asset of a country abroad. This would include the assets of its industries offshore or overseas that earn revenues that will redound to the benefit of the country in general and the country’s citizen in particular. To illustrate: The United States although has a much publicized deficit that runs into billions of dollars has a substantial holding in other countries that earns for it some revenue to maintain its Balance of Payment. Resolving the value of these investments abroad to current valuation enables it to achieve Balance of Paymen