The Components of a Financial Account
A country’s financial account is defined as the balance of payments tracking increases and decreases in the international ownership of assets held by individuals, businesses, the government, or central banks. The assets under ownership include securities such as stocks and bonds, commodities such as silver and gold, currencies, and direct investments.
Financial accounts comprise the following two chief components:
- The domestic ownership of foreign assets. If these increase, so does the total balance of the financial account. These foreign assets may be grouped into the following three components: private, government, and central bank reserves.
- The foreign ownership of domestic assets. If this sub-account increases, the value of the overall financial account decreases. Domestic assets can be siloed into private assets and foreign official assets.
These two sub-accounts are important because the financial accounts they collectively comprise can help offset a trade deficit.