Capital Account
Candlefocus EditorThe capital account is important in helping economists to assess a country’s financial performance. It provides a measure of a country’s net inflows and outflows of capital, allowing for the analysis of the country’s access to capital from abroad. It is also important in establishing exchange rates, as countries with higher net inflows of foreign capital can afford higher exchange rates for their currency compared to those with lower amounts of foreign capital.
The capital account is divided into two parts: the financial account and the capital account proper. The financial account includes investments in capital assets such as stocks, bonds and real estate; loans, including foreign direct investment and portfolio investment; and short-term capital flows, such as foreign currency deposits and international payment of dividends and interest. The capital account proper includes only those flows of funds that are based on balance of payments considerations, such as foreign aid, debt forgiveness, grants and foreign exchange reserves.
The addition or subtraction of funds to a nation’s capital account is known as capital account transactions or capital transfers. These transactions show the change in a nation’s financial assets, as well as the net increase or decrease in international claims made by a nation’s citizens and businesses. Examples of capital transfers are foreign direct investment, inward and outward remittance, foreign aid, privatization proceeds, and the purchase or sale of foreign currency reserves.
In summary, the capital account is a measure of a nation’s financial performance and provides investors, economists, and policy makers with a comprehensive measure of the amount of foreign capital entering and leaving the country. It allows for the assessment of a nation's ability to access capital from abroad, and to set exchange rates appropriately. Keeping track of the capital account is essential for any country to make sound financial decisions, as it allows for a better understanding of a nation's financial performance and its access to foreign capital.