WHY DO INTEREST PAYMENTS APPEAR IN THE BALANCE OF PAYMENTS? - ProProfs Discuss
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Why do interest payments appear in the balance of payments?



Asked by Lindsey, Last updated: Nov 22, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

The balance of payments is an annual account of what occurs. you are assuming thatthe annual interest income is based solely on capital account investments thatoccurred in the given year, but this is never the case. when bonds are purchased asan asset or sold as an asset to foreigners, interest income may be received or paid foryears to come. each year, all income paid or received is accounted for and is a figurethat does not relate well to capital account transactions that take place in a single year.for example, if canada sold bonds the previous year in the amount of 10 billion, and inthe current year sold another 10 billion in bonds and purchased 10 billion in bonds, youhave to keep in mind that the capital account is going to capture interest payments notonly for the 10 billion bought and sold in the year, but also the 10 billion that was soldin the previous year. in other words, the current account captures all investmentincome paid in or paid out in a given year, but that income can be based oninvestments that were bought or sold a year ago, 10 years ago or even 20 years ago.the capital account only captures the current years inflow and outflow of investmentpurchases and sales.
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