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Financial Account (BOP): A Beginner Guide
Economics

Financial Account (BOP): A Beginner Guide

December 9, 2023 Zafari

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  • What Is a Financial Account?
    • Financial Account Subaccounts
  • What Is the Net Financial Account?
  • Final Words

What Is a Financial Account?

The Financial Account records the flow of financial assets and liabilities between a country and the rest of the world. And individuals, organizations, and the government may own or owe these assets.

Financial account records the flow of securities such as bonds and stocks

Financial assets that residents own in other countries are assets in the accounting. On the other hand, financial assets that foreigners own inside the country are liabilities, according to accounting principles.

Examples of financial assets are precious metals (ex. gold,) foreign currencies, derivatives, special drawing rights, bonds, and stocks.

The Financial Account with the capital account and the current account are components of the balance of payments.

Financial Account Subaccounts

This account has two subaccounts.

  • Domestic ownership of foreign assets: These are foreign bank deposits and securities abroad owned by residents.
  • Foreign ownership of domestic assets: These are bank deposits to domestic banks and securities owned by foreign organizations, individuals, and governments.

A subaccount has three parts: private-owned, government-owned, and central bank reserves.

The financial account increases if foreign money flows into the country. And it decreases if money flows from a country into foreign countries.

What Is the Net Financial Account?

The net financial account reflects the difference between domestic ownership of foreign assets and foreign ownership of domestic assets.

In other words, it shows the difference between what foreigners own inside the country and what residents of a country own in the rest of the world.

This account changes if there is an increase or decrease in domestic-owned and foreign-owned assets.

For example, if a U.S. citizen buys Chinese government bonds, it is a financial asset flow from the U.S. to China. Thus, it increases U.S.-owned foreign assets abroad (in this case, China) and decreases the financial account of the U.S. by a negative value.

In the above example, if we look from American eyes, there has been an increase in domestic ownership of foreign assets and a decrease in the financial account of the USA.

The following table shows the top 10 countries with a Financial Account surplus.

NumberName of CountryFinancial Account Surplus
(USD)
1China310,988,883,954
2Germany243,725,747,840
3Russian Federation230,277,440,000
4Netherlands202,095,862,346
5Norway148,947,592,554
6Saudi Arabia139,586,483,765
7Singapore88,453,941,006
8Kuwait64,250,975,547
9Qatar60,928,021,978
10Japan53,990,676,958
Source: World Bank

The below table shows the top 10 countries with a Financial Account deficit.

NumberName of CountryFinancial Account Deficit
(USD)
1United States804,791,000,000
2United Kingdom82,649,980,278
3India81,422,041,766
4France59,812,071,823
5Brazil58,279,563,265
6Vietnam32,215,000,000
7Chile25,386,620,208
8Turkey21,337,000,000
9Colombia20,630,282,013
10Belgium19,844,222,599
Source: World Bank

Final Words

A financial account deficit means the economy is growing and attracting foreign investment. So, it is not necessarily a bad thing.

But it can be a bad thing.

It is a bad thing if using this money, a country imports more than it exports. It means that this country with a deficit sells its assets and consumes.

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About The Author

Zafari

Zafari is a professional trader and has been in the financial market since 2014. He has a bachelor of public economics and an MBA. For some reason, he does not show his face. And he loves you all!

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