Current account deficit will be financed essentially by a net capital inflow in its capital account

Conversely, a nation’s current account surplus would be accompanied by a net capital outflow in its

Capital account. In this latter instance the excess earnings from its current account surplus will be

Used to purchase the real assets of, and to make loans to, other nations of the world.

Official reserves. The central banks of the various nations hold quantities of foreign currencies

called official reserves which are added to or drawn upon to settle any net differences in current and

Capital account balances. For example, in the given year the surplus in American capital account

was considerably less than the deficit in American current account, so the USA had a $55 billion

Net deficit on the combined accounts (item 13). Stated differently, the United States earned less

Foreign monies in all of its international trade and financial transactions than it used.

The important point for immediate purposes is that the three components of the balance of payments

Statement — the current account, the capital account, and the official reserves account — must sum to

zero. Every unit of foreign exchange used (as reflected in “minus” outpayment or debit transactions)

in international transactions must have a source (our “plus” inpayment or credit transactions).