Financial Account (Balance of Payments)

The financial account shows how a country's current account is financed. When a country runs a current account deficit, it must receive more investment or borrowing from abroad than it sends out, which appears as a net inflow in the financial account. A country with a current account surplus typically invests the excess abroad.

The financial account is usually divided into several types of investment. Direct investment covers lasting ownership stakes, such as a foreign company building or buying a factory. Portfolio investment covers purchases of shares and bonds. Other investment includes loans and bank deposits. Reserve assets are changes in the central bank's holdings of foreign currencies and gold.

For example, if foreign investors buy 30 billion of a country's government bonds and a foreign carmaker spends 10 billion building a factory there, these appear as inflows in that country's financial account.

In principle, the current account, capital account and financial account together sum to zero, because every international transaction has two sides. In practice, measurement errors mean a balancing item is usually needed.