Need some Help urgently!! (1 Viewer)

[MinnieMinnie]

Question:
BOP= CAD + Capital and Fin. Acc surplus =0
Making reference to the equation above, Explain the relationship between Capital and Financial Account and Net primary Income deficit.
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I've been trying to figure out this question out but I am not able to understand it, I am stuck. Any help would be appreciated. thank you

 

[Zacharia Villegas]

So as the KAFA(Capital and Financial account) increases due to an investment inflow from foreign sources, this leads to a worsening of the NPY(Net Primary Income) because of the education CAD + KAFA = 0 and the investment inflow must be repaid through servicing costs. An increase in the surplus on KAFA can cause an increase in the deficit on the CAD to offset the increase and satisfy the equation.

 

[MinnieMinnie]

So as the KAFA(Capital and Financial account) increases due to an investment inflow from foreign sources, this leads to a worsening of the NPY(Net Primary Income) because of the education CAD + KAFA = 0 and the investment inflow must be repaid through servicing costs. An increase in the surplus on KAFA can cause an increase in the deficit on the CAD to offset the increase and satisfy the equation.

Thank you for helping me!