What is the relationship in Australia between the current account and capital and financial account?

The relationship between the current account and the capital and financial account in Australia, as in any other country, is based on the balance of payments system. The balance of payments is a statistical statement that systematically summarizes, for a specific time period, the economic transactions of an economy with the rest of the world.

1. Current Account: The current account records the transactions in goods, services, income and current transfers between resident and non-resident entities. If Australia exports more than it imports, it will have a current account surplus. If it imports more than it exports, it will have a current account deficit.

2. Capital and Financial Account: The capital account records transfers of capital between Australia and other countries. The financial account records investment flows – both Australian investment abroad and foreign investment in Australia.

The relationship between the two is that they should balance out. If Australia has a current account deficit, it needs to fund this by either running down its reserves or by borrowing from the rest of the world, which would be recorded in the capital and financial account. Conversely, if Australia has a current account surplus, it could lend to the rest of the world or build up its reserves, also recorded in the capital and financial account.

In summary, the transactions recorded in the current account should be offset by the transactions in the capital and financial account, keeping the overall balance of payments in equilibrium.