The current financial transaction carried out by a nation with other countries across the world is measured by its current account balance. In addition, it is crucial to mention that a nation that borrows from other global partners might operate its current account in deficit. This implies that its position in international investment may have decreased coupled with an increase in debt margin. According to Madura (2012, p. 52), shifts in the current account balance and changes in savings and investment are brought about by current account deficit. The author is emphatic that the cumulative sum of a nation’s current account is equivalent is proportional to its net foreign asset. Therefore, the debt is accumulated from its past total lending and borrowing.
Several other considerations have been pointed out in an attempt to explain the links and shifts in the current account balance as well as changes in savings and investment. Financial analysts cite one of the factors as the growing changes in the overall value of assets. The latter is brought about by the difference between what a nation owns abroad, its returns on assets and the assets that foreigners hold in a nation.
Examination of government budget deficit and surpluses
To begin with, understanding government budget deficit and surpluses in relations to manipulating accounting identities assist in narrowing down specific institutions’ ability to manage their capital investments within a given jurisdiction. Madura emphasizes that by strengthening financial institutions towards effective management of their capital bases, these institutions often link production and domestic savings to investment behavior and consumption. In turn, it positively affects financial and current account balances. It is particularly essential for such organizations to conceptualize risk management measures that can support their ability to maintain investor confidence and consequently enhance trade balance and other transactions.
Darrell, Kaufman, and Raymond’s framework manual is indeed very critical at this point bearing in mind that it offers an integrated outline of a comprehensive system that can be employed within the required regularity framework (Darrell, Kaufman & Raymond, 2007). According to this framework, financial institutions are able of focusing on the existing rules in order to enhance compliance while reducing myriads of risks involved. This framework is particularly essential in financial institutions since it links current and financial accounts and equally provides a platform for identifying prevailing and investable risks, future risks, and mechanisms of addressing the same risks in order to generate high levels of stability.
International financial management researchers concur that for cooperation to be effected across boarders and positive affects felt by a nation, critical terms of trade should be established. Madura (2012, p.78) affirms that the current account balance deficit in international financial management occurs on a global scale and therefore it must be approached from a comprehensive point of view. By ensuring that current account and financial account balances are capable of offsetting each other, Madura points out that it becomes easier to facilitate their response mechanisms. Supervision enhances compliance and can also be facilitated in both space and time. However, the application of this notion as one of the key strategies in enhancing greater efficacy in addressing international financial management is obscured by conflicting economic levels in different countries. A number of countries in developing economies are restricted by both capital and human resources when applying such mechanisms.
Darrell, D, Kaufman, G. & Raymond, J 2007, International financial instability: global banking and national regulation, Sage, New York.
Madura, J 2012, International Financial Management, Mason, Cengage Learning.