III. THE RELATIONSHIP BETWEEN CA, KA AND OSB 

• The most important feature of the Balance of Payments Accounts is that it is a double-entrysystem of accounts: a positive entry in the BOP accounts has a correspondingnegative entryelsewhere in the BOP accounts. Similarly, a negative entry in the BOP accounts has to havea countering positive entry elsewhere in the BOP accounts. 

• This implies that the current, capital and official settlements balances must sum to zero. Sothe following relationship must hold among the component parts of the BOP: 

CA + KA + OSB = 0 

• This can be intuitively understood as follows. The current account balance is the differencebetween current income and current expenditures. A current account deï¬cit implies thatexpenditures exceed revenues. If expenditures exceed revenues, then the country needs toï¬nance the additional expenditure either by borrowing from abroad (KA credit), selling assetsto someone living abroad (KA credit), or by reducing holdings of foreign currency (KA creditor OSB credit). 

• Conversely, suppose that the current account has a surplus, i.e. there was a net inflow ofincome to the U.S. This net inflow must be spent on either buying foreign assets (KA debit),making new loans (KA debit), paying off old loans (KA debit) or for accumulating foreigncurrency (either a KA debit or an OSB debit). 

• Therefore a current account deï¬cit is NECESSARILY accompanied by a capital accountsurplus and/or by an official settlements balance surplus. Similarly, a current account surplusis NECESSARILY accompanied by a capital account deï¬cit and/or by an official settlementsbalance deï¬cit. 

• Some examples of the double-entry bookkeeping system can be helpful. 

Case 1: Mr. A. Phile pays $65,000 in cash to Jaguar of U.K. for a new XJ8 convertible. 

Jaguar d