what is the significant difference between the current account and the capital a
ID: 1225465 • Letter: W
Question
what is the significant difference between the current account and the capital account, when the sum of the two accounts must equal 0?
Less-Developed Countries (LDCs) are caught in a vicious circle of poverty. For output to increase, they must build up capital. To build up capital, they must save and consume less than what they are producing. However, because they are poor, they have little or no extra output available for savings as it must go toward feeding and clothing the current generation. Thus, they are destined to remain poor forever. How should developed-countries and international institutions assist LDCs to develop and are there unintended consequences?
Explanation / Answer
Current account has two parts one is capital account and another is balance of payments, These two together forms current account.
Capital account includes investments into the country like FDI, cash inflows etc.
Less developed countries today are facing crisis from multiple factors, Due to global economic crisis demand for resources have come down, so the most lucrative way of selling raw materials is no longer available for less developed countries.
Further, Investments into LDC's are not coming because of multiple factors. Turmoil in Europe, Recession like conditions in US, Over capacity in China. These three combined problems are almost making LDC's lives miserable.
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